Revenues
Further Limit Annual Contributions to Retirement Plans
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Revenues | 4.9 | 7.2 | 7.5 | 8.0 | 8.4 | 8.6 | 8.8 | 9.3 | 9.7 | 10.1 | 36.0 | 82.5 |
Source: Staff of the Joint Committee on Taxation.
Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections. To the extent that the option would affect Social Security payroll taxes, a portion of the revenues would be off-budget. In addition, the option would increase outlays for Social Security by a small amount. The estimates do not include those effects on outlays.
Current law allows taxpayers to make contributions to certain types of tax-preferred retirement plans up to a maximum annual amount that varies depending on the type of plan and the age of the taxpayer. Annual contribution limits for all types of plans are adjusted, or indexed, for inflation but increase only in $500 increments. In 2014, contributions to individual retirement accounts (IRAs) are limited to $5,500 for taxpayers under the age of 50 and $6,500 for those ages 50 and above. (All years referred to in this option are calendar years.)
Individuals under the age of 50 may contribute up to $17,500 to 401(k) and similar employment-based defined contribution plans in 2014; participants ages 50 and above are also allowed to make “catch-up” contributions of up to $5,500. In general, the limits on an individual’s contributions apply to all defined contribution plans combined. However, contributions to 457(b) plans, available primarily to employees of state and local governments, are subject to a separate limit. As a result, employees who are enrolled in both 401(k) and 457(b) plans can contribute the maximum amount to both plans, thereby allowing some people to make tax-preferred contributions of as much as $46,000 in a single year. Employers may also contribute to their workers’ defined contribution plans, up to a maximum of $52,000 per person in 2014, less any contributions made by the employee.
Under this option, individuals’ maximum allowable contributions, regardless of a taxpayer’s age, would be reduced to about 85 percent of the current-law amount that applies to individuals under the age of 50. For 2015, the limits would be $5,000 per year for IRAs and $15,500 per year for 401(k)–type plans. The option would also require that all contributions to employment-based plans—including 457(b) plans—be subject to a single combined limit. Total allowable employer and employee contributions to a defined contribution plan would be reduced from $52,000 per year to $47,000. Annual contribution limits after 2015 would continue to be adjusted for inflation.