Retiree Portfolio More Money for Your Retirement?

Congress is proposing laws that would raise the contribution limits to 401(k), 403(b), and 457 plans and IRAs. The laws would also permit workers over the age of 50 to make "catch-up" contributions, which would have even higher limits. And folks who change jobs would find it easier to roll over plan balances from one type of plan to another. Passed overwhelmingly by the House, largely supported by the Senate, and acceptable to the president, these changes may be enacted into law before the year is out.

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By David Braze (TMF Pixy)
May 7, 2001

On May 2, 2001, the House of Representatives passed the Comprehensive Retirement Security and Pension Reform Act of 2001 (H.R. 10), a bill that will, if and when enacted, radically alter retirement plan law as we know it. The vote for passage was an overwhelming 407 to 24, an indication of the support this legislation enjoys. An identically named companion piece of legislation, S. 631, was introduced in the Senate on March 27, 2001. The president has indicated his support of the changes.

Unlike last year, when similar legislation passed the House but died in the Senate, this year the outlook for passage of at least the major portion of the House bill looks promising. S. 631 contains essentially identical provisions, and these same provisions were largely supported by the Senate last year. In fact, last year's bill failed simply because it was attached to an unrelated proposal for healthcare legislation that President Clinton strongly opposed. Yes, it's possible a similar fate awaits this year's bill. The Senate might attach it to another bit of legislation pertaining to something like tax reform or Social Security that won't be supported by President Bush or the House of Representatives.

I recognize that much may occur between the time a bill passes and the time it's enacted into law. As a longtime observer of the games politicians play, I know better than to count my dollars before they are safely in my pocket.

But this year, despite any posturing that will go on in the Senate, I think the House provisions will pass the Congress largely intact. Further, I think the president will sign that legislation when at long last it gets to the White House.

If I'm correct (and I sincerely hope I am), here's what I think we can expect to happen:

  1. The maximum annual IRA contribution limit of $2,000 for traditional and Roth IRAs will increase in $1,000 annual increments starting in 2002 to reach $5,000 in 2004. In 2005 and subsequent years, the maximum annual contribution will be indexed to inflation. As of the date of the legislation's enactment, those who are 50 or older may make up to a $5,000 per year contribution.

  2. The vesting schedule for employer contributions to defined contribution plans will decline from the current legal maximum of five years to three years, thereby giving employees 100% ownership of those contributions much sooner.

  3. The maximum annual tax-deferred contribution (elective deferrals in technical jargon) to 401(k), 403(b), and 457 plans will increase from today's $10,500 ($8,500 for 457 plans) to $15,000 in 2006. The increases will be in $1,000 annual increments starting in 2002. When the new limits are reached, the maximum contribution will be indexed in $500 increments for inflation. When the legislation is enacted, those aged 50 or older may make an additional $5,000 contribution over the maximum allowable limit each year.

  4. The portability of assets (i.e., the ability to move money from one plan to another) in 401(k), 403(b), and 457 plans will be enhanced. Employees who change jobs will be able to roll over or transfer their assets from one type of plan to any of the others.

  5. Limits for employee elective deferrals to SIMPLE plans will increase from the current annual maximum of $6,500 to a maximum of $10,000 by 2006. When the legislation is enacted, those aged 50 or older may make an additional $5,000 contribution over the maximum allowable limit each year.

  6. 401(k) and 403(b) plans will be allowed to accept after-tax contributions to a Roth IRA-like account under separate plan-accounting procedures. These after-tax contributions and all earnings would never be taxed provided that withdrawals occur after the account is open for at least five tax-years and the participant is age 59 1/2 or older at the time of the distribution.

  7. Today, employees may contribute up to the lesser of 25% of annual compensation or $10,500 to their 401(k) or 403(b) plans. The proposed legislation will repeal the 25% limit and allow employees to contribute up to 100% of compensation subject to the maximum allowable annual dollar limit.

  8. The new legislation will allow employees and employers together to contribute up to a maximum of $40,000 per year to a 401(k) or 403(b) plan. Today's maximum combined contribution limit of 25% of compensation will be repealed.

  9. Today, participants in state-provided 457 plans see their allowable maximum contribution reduced dollar for dollar when they also contribute to any other retirement plan provided by the state. On enactment of the proposed changes, the 457 plan contribution will no longer be reduced when elective deferrals are also made to other state-provided retirement plans.
In total, more than 50 changes to current IRA and retirement plan laws have been proposed. I highlighted just the few I think are of the most interest to employees. Remember: These actions are just pending. They are a long way from becoming law.

Still, I believe this year they will get there. But if I'm wrong, don't blame me. Blame the politicians. They'll deserve it.

Want to ensure these changes become the law of the land? Then contact both your Senators and ask them to support the provisions found in H.R. 10 and its companion bill, S. 631.

Think these changes are ill advised? (There are some who think any IRA or retirement plan changes will only benefit the "rich.") Then contact both of your Senators and ask them to oppose these bills.

See you next week. In the interim, post away on the Retirement Investing and/or Retired Fools boards.

Best to all...Pixy

Dave Braze usually doesn't trust Congress when it comes to legislation that affects someone's pocketbook. This time, though, Dave thinks the two pending Congressional bills outlined above are on the right track. Therefore, because The Motley Fool is all about investors writing for investors, he brought the highlights of these bills to your attention.