High-Earning Retirement Savers Benefit From Late-Night Tax Proposal Changes

Late night amendments quashed the “mini-Rothification” proposal that would have required all catch-up contributions by individuals earning $500,000 or more to be made as after-tax Roth contributions in the latest version of the the “Tax Cuts and Jobs Act” released last night by the Senate Finance Committee. 

Lawmakers also dropped a proposal that would have imposed for the first time a 10 percent withdrawal on distributions made prior to age 59½ from 457(b) plans.

But while a much greater number of pass-through entities, including investment advisors and their small business customers, would benefit from the 17.4 percent pass-through tax rate, at the back end pass-throughs will pay ordinary income rates on retirement plan distributions. The change is being seen as disincentivizing small business owners who want to create retirement plans.

“As of right now, pass-throughs won’t get the preferential rate on distributions,” the American Retirement Association’s Nevin Adams told Financial Advisor magazine. “The problem is when these individuals are presented with this fact, of paying ordinary income rates on their plan distributions, we’re concerned many will say: ‘I’m not going to set up a retirement plan for myself or employees because I’m not going to get anything out of it.’”

Nevin said the ARA is lobbying vigorously to make the tax rate for pass-through entities’ retirement plan distributions more attractive.    

Overall, however, the night was positive for investors socking money away for retirement.

The proposed elimination of tax deductions for deferred compensation plans that were in the Senate Finance Committee’s markup of the tax reform until late last night were also deleted from the bill, as they have been from the House Ways and Means Committee version.

“We definitely lobbied hard on these issues and overall we are feeling pretty good about the steps taken last night,” Adams says. “Sen. Rob Portman (R-Ohio) had issued amendments to do away with both of the proposed taxes and we are gratified,” Adams says.