EGTRA Loosens 401k Restrictions and Creates Roth 401k

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) took another step to spur saving through 401k and other DC plans. EGTRRA increased the annual DC plan contribution limits and specified that, after 2006, maximum annual deferral amounts would be indexed to inflation.

In addition, the restrictions placed on employee deferrals were loosened as the limit on pre-tax contributions was increased and additional “catch-up” contributions were allowed for employees age 50 and older. With the goal of preserving retirement accounts even when job changes occur, EGTRRA increased the opportunities for rollovers among various savings vehicles (401k plans,403b plans, 457 plans, and IRAs). In addition, EGTRRA permitted 401k plans to offer a “Roth” feature for aftertax contributions. ¹

Notes:

Source: Investment Company Institute, 401k Plans: A 25-Year Retrospective [↩]

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Some Myths About 401k’s
Myth 4: Most people take loans or cash out of their 401k's.

• A loan from a 401k's is sometimes a necessity for a participant, however, nearly four out of five participants have rejected the urge to take out a loan.

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Despite the steady shift of the burden of retirement planning to the individual, average voluntary contributions to DC plans have remained low at 7 percent to 8 percent of pretax income, unchanged over the past 10 years. While this could be adequate for an individual who consistently contributes from age 30 to 65, many Americans start saving past the age of 30 and retire at age 62, which leaves them well short of their needs. (SOURCE: McKinsey & Company, Restoring Americans' Retirement Security: A Shared Responsibilty)

EGTRA Loosens 401k Restrictions and Creates Roth 401k

Some Myths About 401k’s

401k Recent Articles

401k Facts