Senator to Propose Measure Raising Limits on 401(k) Plans

Sen. William Roth--the powerful Delaware Republican who created the Roth IRA--said Friday that he plans to do for company-sponsored retirement accounts what he has done for individual retirement accounts. He’s also planning to propose vast changes to traditional IRAs, as well as to the newer Roth IRA, that would throw open eligibility to millions more Americans and allow people to save substantially more.

“I hear from Americans every day who say that the laws on pensions are too restrictive and prevent them from saving as much as they would like,” Roth said in a prepared statement as he announced the proposed legislation.

As Congress and President Clinton debate how to ensure the solvency of the Social Security retirement system, lawmakers are examining dozens of ways to help people save.

However, Roth’s proposals, which he plans to introduce this month, stand out because the chairman of the Senate Finance Committee is believed capable of brokering a deal to get at least some of his proposals passed and onto the president’s desk.

As with Roth IRAs, contributions to the new 401(k) and 403(b) plans would not be tax-deductible. At retirement, however, contributions and investment earnings could be withdrawn tax-free. 401(k)s are tax-favored retirement plans sponsored by companies, while 403(b) plans are sponsored by schools and other nonprofit organizations.

Contribution limits also would be raised by 50% for both types of employer-sponsored plans. For instance, those participating in 401(k) programs are able to contribute a maximum of $10,000 each year to these plans. Under Roth’s proposal, that would rise to $15,000.

Roth also wants to hike allowable contributions and dramatically liberalize the rules related to traditional and Roth IRAs.

His proposal would allow individuals to contribute $5,000 annually--more than twice the current annual limit of $2,000--to any IRA. Income restrictions, which bar millions of Americans from receiving tax benefits for IRA contributions, would be eliminated.

Currently, individuals covered by qualified pensions can only deduct contributions to traditional IRAs if they earn less than $30,000 if single and less than $50,000 if married filing jointly. Individuals earning more than $95,000 and couples with joint income in excess of $150,000 are restricted from contributing to Roth IRAs.

Roth also wants to raise the income threshold that bars high-income taxpayers from converting traditional IRAs to Roth IRAs. Currently, savers are unable to convert a traditional IRA to a Roth IRA if they earn more than $100,000 annually, whether single or married. Roth proposes to raise that limit to $1 million.

Meanwhile, he wants to give older savers the ability to “catch up” with their savings. Those who are 50 or older would be able to contribute an extra 50% to tax-favored retirement accounts.

In a nutshell, a 50-year-old saver would be able to contribute up to $22,500 to a 401(k) plan and up to $7,500 to an IRA.

“Roth is in a good position to at least get this through Congress,” says Nicholas Kaster, senior analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

“Nothing is going to come out of Congress exactly as it is proposed,” adds Ed Slott, a New York-based tax accountant and author of “Your Tax Questions Answered.” “But, when the chairman of the Senate Finance Committee proposes something, you take it very seriously.”