New Retirement Legislation

You are finally back from the beach, the mountains, the wild west -- wherever you spent your summer vacation -- and now it is time to re-focus on the family finances. (Hopefully you spent your vacation somewhere other than rain-soaked New England!) Well, in your absence your US House of Representatives passed a new bill. It is called the Comprehensive Retirement Security and Pension Reform Act and it could impact all of us. I say "could" because the bill is not law until it is approved by the Senate and then signed by the President. The Senate will review the bill this fall. You may have heard rumors about the bill on the beach and I thought I would clarify the ramifications for you.

The heart and soul of the bill is to allow for greater savings for retirement! The legislation will allow individuals to invest more each year into 401k and IRA accounts, enable "late savers" to play catch-up, and it will improve retirement plans for small businesses. This is a bill that is long overdue, in my opinion.

Small Business Retirement Plans

There is some good news for the small business owner contained in this proposed legislation. If you are a business owner and have been looking for the right retirement plan you may have experienced some frustration. The core of this frustration probably extends from the fact that every plan currently available seems to have flaws. For example, a SEP may subject you to put away the same percentage contribution for each employee as you do for yourself -- which can be too expensive; a SIMPLE plan allows for employee contributions but the maximum for everyone is only $6,000 per year -- which is just not enough in many cases; and 401k’s have higher costs and extra administrative hurdles.

Well, Uncle Sam is attempting to help the small business owner with this legislation. If the changes go into affect a new SIMPLE plan would be available that does not require employer contributions. In this new version of the SIMPLE, employees could save up to $5,000 of their own money in pre-tax dollars. Furthermore, current SIMPLE plans would be amended to allow for maximum contributions - employer and employee - of $10,000 (up from the current max. of $6,000.)

If you are a small business owner, the changes to the SIMPLE might be the kind of corrections you were looking for. However, if you were always leaning towards a 401k plan but have avoided it because of the administrative hassle and costs, then you should look into a "Safe Harbor" 401k. The Safe Harbor 401k is not part of the proposed legislation mentioned above, it became law in 1996. A Safe Harbor plan does not require the contribution and deferral testing that are part of the traditional 401k. Thus, a Safe Harbor 401k gives the small business owner the power and flexibility of the 401k plan but does not put the owner in the position of overfunding his/her contribtuion. The owner can then always invest the maximum.

Individual Retirement Accounts

401k's: It is a little known fact that the maximum amount one can contribute to a 401k plan actually increases every year. The amount of the increase is based on the rate of inflation. Currently, one can invest up to a maximum of $10,500 -- not $10,000, which is the number people frequently quote. The House bill, when adopted, will accelerate the annual increase on the maximum amount. The new limits are as follows: 2001 - $11,000; 2002 - $12,000, 2003 - $13,000; 2004 - $14,000, 2005 - $15,000. This is obviously good news for everyone who would like to put more money away towards retirement.

Another wrinkle proposed in the legislation is to create a Roth like 401k option. In other words, as with a Roth IRA, your contributions would not be tax deductible. However, also similar to a Roth, all withdrawals after age 59 1/2 would be tax free!

IRAs

The best news for all of you who do not have a retirement plan at work or would like to save more outside of the work plan, is the proposed increased maximum contributions to IRA’s. Maximum contributions will increase for all investors to $3,000 in 2001; $4,000 in 2002; and $5,000 in 2003. After 2003 the increase would be tied to inflation and ultimately increase in increments of $500. These proposed new maximums are for traditional IRA’s and Roth IRA’s. Remember, if the bill were to pass, you would be able to make a $3,000 contribution in January 2001 towards your 2001 IRA, not towards your 2000 IRA.

Some of you are now wondering about the deductibility of traditional IRAs. Congress has chosen to maintain income limits on deducting IRA contributions for those who have a qualified plan at work. The current income limits for deductibility begin at $52,000 for those married and filing jointly and are exhausted at $62,000. For the single tax filler the range is from $32,000 to $42,000. Of course, if you do not have access to a qualified plan at work, your contribution to a traditional IRA is tax deductible regardless of income level.

I am a believer in Roth IRA’s and if you haven’t opened one, you should strongly consider building this tax free nest egg for your retirement, even if you have a plan at work.

Late Savers

What is a late saver? It is someone who is over age 50. Congress is concerned that individuals in that age bracket may not have saved enough towards retirement and with social security having its own problems, the new legislation will allow these individuals to save even more.

First, late savers will be able to contribute $5,000 to an IRA/Roth IRA starting in 2001, if the legislation is signed into law. That is an instant increase of $3,000 per year per person, and $6,000 per couple! Secondly, late savers who participate in a 401k plan will be able to increase their annual contributions by $5,000 over and above their current maximum. The combination should be a great help to people over 50 who have the financial capacity to increase their retirement contributions.

In summary, this legislation could be beneficial to just about everyone. So call your senator today and then start putting away some cash so that you can increase your retirement contributions if it becomes law.

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