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© TAX ANALYSTS. Reprinted with permission.
Note: This report is available in its entirety in the Portable Document Format (PDF).
The President’s Advisory Panel on Federal Tax Reform proposes to expand greatly the amount individuals can contribute to tax-free savings accounts. Under its proposal, married couples would be able to save $40,000 per year in tax-free accounts. That increase in individual contributions is in addition to amounts employees may now contribute to employer-sponsored 401(k) plans and other tax-deferred accounts (DC plans).
Recent tax legislation has significantly increased the maximum amount that employees may contribute to employer-sponsored DC plans. The dollar limit on employee contributions lagged behind the growth in average earnings during the 1990s, declining from 39 percent of average earnings ($7,797) in 1990 to 32 percent of average earnings ($10,500) in 2001, but has been increasing every year since then and will reach 39 percent of earnings in 2006 ($15,000). Employees over age 50 may make additional ‘‘catch-up’’ contributions, which will amount to $5,000 by 2006, raising the total dollar limit for them to 52 percent of average earnings. (See chart below.)
While the amount employees may contribute to plans is rising, very few employees contribute the maximum allowable amount. Of those participating in plans, less than 4 percent contributed the maximum amount in 1990. The share of maximum contributors rose to more than 7 percent in 2001, but the share dropped back to 6 percent in 2003, as many employees did not take advantage of the catch-up provision. Additional increases in the contribution limit are likely to reduce further the share of those who contribute the maximum.
Note: This report is available in its entirety in the Portable Document Format (PDF).
The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see http://www.taxpolicycenter.org/taxfacts.
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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