What You Have to Know
- Taxpayers with incomes beneath $100,000 can be allowed to make catch-up contributions both earlier than or after tax.
The ultimate textual content of the bipartisan Enhancing American Retirement Now (EARN) Act, launched by Senate Finance Committee Chairman Ron Wyden, D-Ore., and Sen. Mike Crapo, R-Idaho, on Sept. 8, features a new twist: Taxpayers with incomes beneath $100,000 can be allowed to make catch-up contributions as both pre-tax or after-tax contributions.
“That is fascinating because it provides individuals a alternative of taking an upfront tax deduction, or not,” Ed Slott of Ed Slott and Co., instructed ThinkAdvisor Friday in an electronic mail.
Nonetheless, Slott mentioned, “Congress appears to be leaning extra to have catch-up contributions go to after-tax accounts, like Roth IRAs and Roth 401(ok)s as a income raiser. After-tax contributions elevate income by eliminating tax deductions for contributions. This is the reason lots of the enhanced Roth provisions within the [Secure Act 2.0] payments are within the part titled ‘Income Provisions.’ Congress has been repeatedly encouraging Roth IRAs since they convey in tax cash up entrance.”
As attorneys William Byrnes and Robert Bloink write of their TaxFacts Intelligence weekly e-newsletter, the EARN Act modifications would apply in tax years starting after 2023. “Whereas the EARN Act should now be reconciled with the Home model, it now appears potential that taxpayers might have an extra choice in terms of retirement financial savings,” the 2 write.
As Bloink and Byrnes observe, the EARN Act proposes to “change the principles governing catch-up contributions in order that taxpayers aged 50 and older can be permitted to contribute an additional $10,000 per 12 months if they’ve reached age 62, 63 or 64 (at present, qualifying taxpayers could make catch-up contributions of $6,500 per 12 months to 401(ok)s and $1,000 per 12 months to IRAs). SIMPLE plan individuals would obtain an extra $5,000 catch-up choice. The extra catch-up, nevertheless, can be made on an after-tax foundation (so it could be handled as a Roth contribution and might be withdrawn tax-free sooner or later).”