The Securing Additional Value for Every Retirement Saver (SAVERS) Act intends to temporarily raise contribution limits for defined contribution plans. This includes 401(k), 403(b) and 457 plans, as well as IRAs. It includes your Solo 401k and self directed IRA account. We’ll get into the details about what this legislation could do for you. However, unfortunately the legislation stalled in the House Ways and Means Committee (at the time publishing). After reading this blog, you may want to contact your representative to request prompt action.
You can find your representative at: https://www.house.gov/htbin/findrep. As an alternative, you can use this link: https://www.house.gov/representatives/find-your-representative.
Overview of House Bill 6562
As with any legislation in progress, House Bill 6562 is subject to change before it becomes law. But here is the bill as originally written. In a nutshell, the SAVERS Act would triple the allowable maximum contribution limits for 2020. Participants would be able to contribute up to 100% of their annual compensation from 2019 or 2020 (whichever is higher). Here is the key information about the SAVERS Act in its current form:
- The SAVERS Act temporarily raises contribution limits for tax-preferred defined contribution plans, including 401(k)s, 457 plans, and Individual Retirement Accounts (IRAs), among others.
- Typically, contributions are capped at the saver’s annual compensation or a fixed dollar amount for all participants, whichever is less. For example, the fixed dollar amount contribution limit for 401(k)s in 2020 is $19,500.
- The SAVERS Act triples maximum contribution limitations for 2020 and, for savers limited by their annual income, allows such savers to contribute up to 100% of their annual compensation from 2019 or 2020, whichever is higher.
Bigger Contributions for Solo 401k with SAVERS Act
As stated, the current 2020 maximum contribution amount for a Solo 401k is $19,500, while the self directed IRA is capped at $6,000. These caps do not include the “catch-up” contributions. Those aged 50 years and older can contribute an additional $6,500 to their Solo 401k. This equates to a total of $26,000 in 2020.
This bill is important to follow by anyone looking for additional tax relief this year. Additionally, you can increase retirement savings because if the SAVERS Act becomes law, your contribution strategy in 2020 could likely change. The sooner it becomes law, the sooner you can take action on a new higher-valued tax strategy.
As long as it remains in committee, the outcome of any legislation is uncertain. Quite possibly HR 6562 will not survive as a separate bill. However, Congress may it fold this into larger legislation related to the COVID-19 recovery.
Once-in-a-Lifetime Opportunity for High-Income Earners
The SAVERS Act proposes these changes ONLY for tax year 2020. Annual contribution limits typically index to inflation (Consumer Price Index). Indexing to inflation means that although the allowed contribution goes up annually by about $1,000, so have your earnings. The result is normally only a marginal effective increase in this high-value tax shelter. In fact, for tax year 2016, inflation was insufficient to produce an increase in Solo 401k contributions.
Remember, the SAVERS Act proposes only a TEMPORARY increase in contributions. Congress and the IRS wouldn’t let people defer that large of a chunk from their tax bill indefinitely!
Perhaps on its own the SAVERS Act is a long shot. However, it could find its way into another stimulus or recovery bill. If HR 6562 is important to your retirement strategy, let your representative know it should be passed as written or folded into a larger bill that is likely to become law. As a once-in-a-lifetime opportunity, it’s worth the effort. Keep in mind that this is an election year. Typically very little legislation is signed into law. However, it may be worth an effort to contact your local representative. Especially now Americans feel the pinch of the economic crisis. The ability to save more and defer taxes provides relief for many.
What the SAVERS Act Could Mean to You
Because the limits could be applied to your 2019 or 2020 earnings, even if your earnings are struggling this year, you could still receive a significant tax deferment if the contribution limit is based on your 2019 income.
The current elective deferral limit for Solo 401ks in 2020 is $19,500. But under the SAVERS Act, a plan participant would be able to contribute, in aggregate, up to the lesser of $58,500 or 100% of their compensation for either 2019 or 2020. The $58,500 is only the employee portion of the contribution. It does not include the employer portion of the contribution. If your spouse participates in the Solo 401k, you could possibly double that amount.
If the SAVERS Act becomes law and you have the financial ability, you may want to use an once-in-a-lifetime strategy to maximize this opportunity. This isn’t only about deferring taxes for 2020. Being able to make a super-sized contribution this year will pay compounded returns for years to come using the tax-deferred funds. It could catapult your retirement account to an entirely new level.
We will continue monitoring the progress of the SAVERS Act to keep you informed on how it might affect your retirement contribution strategy if and when it is signed into law.
Have questions about growing your retirement account? The 401k experts at Nabers Group will help you get your retirement funds into your control, where they belong.