Fox Business is reporting that Senator Orrin Hatch (R-UT), Chairman of the Senate Finance committee, will be introducing an amendment to the Senate’s tax bill that would eliminate the current catch-up contributions allowed to 401(k) programs for people 50 and older.
Because the Thrift Savings Plan is based on the same IRS rules governing contributions to 401(k) plans, the amendment would presumably impact federal employees who contribute to the TSP who also meet these criteria. In this case, Hatch’s proposed amendment would impact those who are 50 and older who make catch-up contributions.
Under current law, individuals 50 and older are allowed to make an additional $6,000 contribution to a 401(k) or the TSP in addition to the annual $18,000 limit (this will be increased to $18,500 in 2018).
In lieu of the $6,000 pre-tax catch-up contribution, Hatch’s amendment proposes that individuals 50 and up could contribute $9,000, but it would be done with after-tax dollars, thereby requiring the funds to go into a Roth 401(k) or Roth TSP. Although the tax would be paid today, the advantage of the Roth account is that in the future, when the funds are withdrawn at retirement, no taxes would have to be paid at that time.
Update: This amendment has been dropped in some of the latest Senate debates. See Hatch Drops Catch-Up Contributions Amendment from Senate Tax Bill
Changing Law Regarding Roth IRA’s
Update: I previously reported in error that Hatch’s amendment would take away the ability to convert a traditional IRA to a Roth IRA. This, however, is not the case. My thanks to one of our readers for bringing this to my attention.
Hatch’s amendment proposes eliminating Roth “recharacterizations”. According to CNBC, this is a “do-over” of a Roth conversion:
Since you pay income taxes in the present on the amount of money you convert to a Roth, a conversion may bump your taxable income into a higher bracket.
Recharacterizations allow you to undo these transactions and spare you the taxes.
Both the House and Senate have introduced their own tax reform bills, and more changes are likely to take place to both as they work their way through the legislative process. The articles below provide more details on the proposed bills and related topics.