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 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2023–
Decrease (-) in the Deficit -9.2 -12.7 -13.1 -14.4 -15.8 -16.9 -17.4 -17.5 -17.5 -17.8 -65.2 -152.3

Data source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2023.

To the extent that the option would affect Social Security payroll taxes, a portion of the decrease in the deficit 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. The most common such plans are defined contribution plans (any plan that does not guarantee a particular benefit amount upon retirement) and individual retirement accounts (IRAs). Defined contribution plans are sponsored by employers. Some—most commonly, 401(k) plans—accept contributions by employees; others are funded entirely by the employer. IRAs are established and funded by the participants themselves. Traditional tax-preferred retirement plans allow participants to exclude contributions from their taxable income and defer the payment of taxes until they withdraw funds. Contributions to Roth retirement plans, by contrast, cannot be excluded from taxable income but are not subject to tax when withdrawn.

People under the age of 50 may contribute up to $20,500 to 401(k) and similar employment-based plans in 2022; participants ages 50 and above are also allowed to make "catch-up" contributions of up to $6,500. Contributions to 457(b) plans, which are available primarily to employees of state and local governments, are subject to a separate limit. Employers may also contribute to their workers' defined contribution plans, up to a maximum of $61,000 per person in 2022, minus any contributions made by the employee.

Under current law, combined contributions to traditional and Roth IRAs are limited to $6,000 for taxpayers under the age of 50. People age 50 or older can make additional catch-up contributions of up to $1,000. Taxpayers with income above certain thresholds are not allowed to contribute to Roth IRAs. However, some participants can circumvent those limits by contributing to a traditional IRA and then converting it to a Roth IRA. Annual contribution limits for all types of plans (except IRA catch-up contributions) are adjusted, or indexed, to include the effects of inflation.

Under this option, a participant's maximum allowable contributions would be reduced to $17,500 per year for 401(k)–type plans and $5,000 per year for IRAs, regardless of the person's age. 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 $61,000 per year to $51,000. As under current law, those limits would be indexed. Finally, conversions of traditional IRAs to Roth IRAs would not be permitted for taxpayers whose income is above the top threshold for making Roth contributions.