In order to address the issue of baby boomers and others not having enough savings to address their financial needs during retirement, we have introduced the Retirement Savings Opportunity Act to give these working Americans the opportunity to save more for retirement. Provisions of the bill are as follows:
Increase IRA Dollar Limit. The maximum contribution limit for IRAs (both traditional IRAs and Roth IRAs) is $2,000, which has never been indexed for inflation. If the IRA limit was indexed for inflation, it would be $4,930. The limit for all IRAs will be increased to $5,000 per year. In addition, this limit will be adjusted annually for cost of living increases, in $100 increments.
Increase IRA Income Caps. There are different and confusing caps on contributions to traditional and Roth IRAs. They are as follows:
Tax Deductible Contributions to Traditional IRAs. If an individual is an active participant in an employer-provided pension plan, the amount of a deductible contribution that can be made is reduced if the adjusted gross income of the taxpayer is over $51,000, if filing a joint return, or $31,000, for all other filers. These income limits are scheduled to increase annually until the year 2007 when the joint filer limit will be $80,000 and the single filer limit will be $50,000. Married, filing separately taxpayers are precluded from making deductible contributions if their adjusted gross income is above $10,000. In addition, if an individual is not an active participant and the individual's spouse is, the income limit is $150,000. The bill will eliminate these income limits for deductible IRAs.
Contributions to Roth IRAs. A full $2,000 contribution can only be made to a Roth IRA if a single taxpayer's adjusted gross income is less than $95,000 and married taxpayer's adjusted gross income is less than $150,000. The bill will eliminate these income limits for Roth IRA contributions.
Conversion to Roth IRAs. In order to convert to a Roth IRA, an individual's adjusted gross income must not exceed $100,000, regardless of whether the individual is married filing jointly or single. Married individuals who are filing separately cannot convert to a Roth IRA. The bill will raise the income cap for conversions to $1 million.
Increase Other Dollar-Based Benefit Limitations. Currently, the maximum pre-tax contribution to a 401(k) plan or a 403(b) annuity is $10,000. In addition, the maximum contribution to a 457(b) plan (a salary deferral plan for employees of government and tax exempt organizations) is $8,000. Finally, the maximum contribution to a SIMPLE plan (a simplified defined contribution plan available only to small employers) is $6,000. These limits are indexed for cost-of-living increases. There has traditionally been a differential in contribution limits among the various types of plans: IRAs (which are individual plans) having the lowest limits; SIMPLE plans having a greater limit -- but not as much as a 401(k) plan; and 401(k) and 403(b) plans having the highest limits, but the greatest number of regulations. Since the IRA limit will be raised to $5,000, the bill will increase limits for 401(k) and 403(b) plans to $15,000, 457 plans to $12,000 and SIMPLE plans to $10,000; thereby continuing the differential.
Roth 401(k) or 403(b) Plan. The bill provides that companies can give participants in 401(k) plans and 403(b) plans the opportunity to contribute to these plans on an after-tax basis, with the earnings on such contributions being tax-free when distributed, like under the Roth IRA. More than the maximum Roth IRA contribution amount can be contributed under this option; employees would be limited to the maximum 401(k) or 403(b) contribution amount. The regular distribution rules (rather than the Roth IRA distribution rules) for these types of plans would apply.
Catch-Up Contributions. This provision will provide an additional savings opportunity to those individuals who are close to retirement. The bill will give those who are age 50 the opportunity to contribute an additional amount in excess of the annual limits equal to an additional 50% of the annual limit. Catch-up contributions will be allowed in 401(k) plans, 403(b) plans, 457(b) plans and IRAs. For IRAs, this will mean that someone age 50 could contribute $7,500 each year rather than $5,000. These additional catch-up contributions will not be subject to the normal non-discrimination rules for other contributions.
Small Business Incentives. Since employees of small businesses are less likely to be covered by a retirement plan, we have added the following provisions which will assist small businesses in establishing retirement plans:
Tax Credit for Start-Up Costs. A non-refundable tax credit of up to $500 would be available to small businesses with up to 100 employees to defray the administrative costs of establishing a new retirement plan. This credit would only be available for the first three years of operation of the plan. This credit could be carried back for one year or forward for 20 years (the general business credit carryover rules).
Tax Credit for Contributions. A non-refundable tax credit equal to 50% of employer contributions made on behalf of non-highly compensated employees would be available to small businesses with 50 or less employees during the first 5 years of a plan's operation. Only contributions of not more than 3% of compensation are eligible for the credit. This credit could be carried back for one year or forward for 20 years.
Small Business Defined Benefit Plan. This plan will provide employees of small businesses with a secure, fully portable, defined retirement benefit without imposing the complex rules and regulations of normal defined benefit plans. This plan, called the Savings Are For Everyone (SAFE) plan, is meant to complement the successful SIMPLE defined contribution plan that is available for small businesses.
Elimination of 25% of Compensation Limitation. Currently, the maximum amount that can be contributed to a defined contribution plan on behalf of an individual participant is the lesser of $30,000 or 25% of compensation. This includes both employee contribution and any matching contributions or profit sharing contributions made by the plan sponsor. This bill will eliminate the 25% of compensation limit, so that the maximum contribution that is made on behalf of any individual is $30,000.
Tax Deduction for Employee Deferrals. Under current law, an employee pre-tax deferral is treated as employer contribution and is subject to the limits on how much an employer can take as a tax deduction on qualified plan contributions. With the increased amount of pre-tax savings that we anticipate employees will make after enactment of this bill, there is a concern that the maximum limit on deductible contributions will be reached. This bill will permit employer to fully deduct any employee pre-tax deferrals, without regard to the maximum limit on deductions. Other employer contributions to a plan, however, will continue to be subject to this deduction limitation.
IRA Contributions to an Employer Plan. The bill gives employers the opportunity to accept traditional IRA contributions as part of their regular employer plan. In addition, it gives employees the ability to have IRA contributions made directly to the employer-sponsored IRA as a payroll deduction. The advantage of using an employer plan as an IRA account is that the administrative costs in an employer plan are usually much less than the costs in a privately maintained plan.
Full Funding Limit Increase. Currently, amounts that can be deducted as contributions to a pension plan are limited to the lesser of the plan's actuarial cost or 150% of the current liability amount of the plan. The current liability amount does not take into account projected pension benefits. The 150% of current liability limitation is eliminated in this bill.
March 15, 1999