November 2017: House Passes Tax Bill But Does Not Yet Affect Solo 401k Plans

While the House of Representatives recently passed a tax bill that would affect IRAs and retirement plans such as solo 401k plans, it is not final until the Senate approves it.

Here are some of the proposes changes in the tax bill that would affect retirement accounts.

1. No more Roth IRA re-characterizations. While re characterizations do not apply to Solo 401k plans, they do apply to IRAs. Under the pending tax bill, those that convert their pretax or after-tax IRAs to a Roth IRA will no longer be able to change their mind and reconvert back to an IRA.

2. No more contributions to both 457 plans and 401k plans including solo 401k plans. Under current law, one can maximize both 457 plan and solo 4o1k contributions, allowing one to essentially double up on contributions. The pending tax bill would eliminate this.

Following are some of the proposed changes that are NOT  in bill:


Mandatory Roth 401(k) catch-up contributions

  • Currently, employees under age 50 can save up to $18,000 a year in a 401(k)-type plan before taxes, while those 50 or older can set aside up to $24,000.
    Under an amendment introduced recently by Sen. Orrin Hatch (R., Utah), anyone eligible to put in an amount above $18,000 would have to do so in a Roth account, which unlike a 401(k) offers no upfront tax deduction but instead allows the money to be withdrawn tax-free.
  • This amendment wasn’t included in a list of modifications to the bill backed by the Senate Finance Committee chairman on Wednesday.
  • To make the change more palatable, the amendment would have raised the catch-up contribution limit from $6,000 to $9,000 a year, Ms. Borland says

 Elimination of 401(k) catch-up contributions for high earners

  • As originally proposed, the Senate bill would have done away with the extra $6,000 workers age 50 and older can contribute each year to 401(k)-type plans—but only for those with salaries of $500,000 or more. Lawmakers have removed the provision.

 A 10% penalty on early withdrawals from 457 plans

  • People who withdraw money from most 401(k)-style plans before age 59½ must pay income tax plus a 10% early withdrawal penalty on the money. Thanks to a quirk in the law, the 10% early withdrawal penalty doesn’t apply to 457 plans. While the original Senate bill would have imposed the 10% penalty on 457 plans, the Senate Finance Committee chairman removed that measure from the bill Wednesday.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>