U.S. workers may soon have to make more choices
about where to invest their retirement money -- even though
a recent poll says most want someone else to choose how their
nest eggs are invested.
The new options come in the form of the
Roth 401(k) proposed by Senate Finance Committee Chairman
William Roth, R-Del.
Higher contribution
The plan would echo the senator's Roth IRA, allowing U.S.
savers to put after-tax money into their 401(k) plans and
withdraw the money tax-free at the age of 591/2. Roth also
aims to increase the maximum annual pretax contribution to
regular 401(k) plans from $10,000 to $15,000.
Current 401(k) plans give savers a tax
break on the money they invest while working, and lets that
untaxed principal build up tax-free until workers retire and
start making withdrawals from their accounts. The money --
including principal and gains -- is taxed then, presumably
at the lower rates that apply to most retirees.
With a standard 401(k), a person contributes
up to 15 percent of his income each year. The person's employer
may match the contributions to some extent. Typically, the
person has the option of deciding how to invest the total
contribution.
"It would have the same effect as
the Roth IRA," says Ginny Flynn, press secretary of the
Senate Finance Committee. "Your earnings and contributions
are withdrawn tax-free so the buildup to retirement is much
is greater."
Pay
taxes now, not later
As with Roth IRAs, contributions to the new 401(k)
and 403(b) plans would not be tax-deductible. At retirement,
however, contributions and investment earnings could be withdrawn
tax-free. The difference between the two plans is that 401(k)s
are tax-favored retirement plans sponsored by companies, while
403(b) plans are sponsored by schools and other nonprofit
organizations.
Contribution limits also would be raised
by 50 percent for both types of employer-sponsored plans.
For instance, those participating in 401(k) programs are able
to contribute a maximum of $10,000 each year to these plans.
Under Roth's proposal,that would rise to $15,000.
Call for
scrutiny
Some critics are leery of Roth's plan, saying it
looks like a tax break for the wealthy."It's a gift horse
that ought to be looked in the mouth," warns Robert McIntyre,
director of Citizens
for Tax Justice, a Washington-based consumer watchdog
group. "In the short run, it may benefit those with middle
income, but these are the same people who will end up paying
for it as a subsidized tax break for the wealthy."
McIntyre concedes that realistically,
the new 401(k) will not have an impact on wage earners and
those companies that don't sponsor the retirement program.
To counter that criticism, another Roth
proposal aims to give lower-income workers money for retirement
by establishing "personal retirement accounts."
Each eligible individual would receive a minimum amount of
$250 per year, plus an additional amount based on how much
they paid in payroll taxes. During the life of the program,
a minimum wage earner -- someone earning $12,400 this year
-- would receive about $1,850. An average wage earner -- earning
$27,600 -- would receive about $2,590.
Few
are saving
According to Roth's Senate Finance Committee, nearly half
of all Americans report that they have less than $10,000 in
savings. Of people aged 51 to 61 -- those closest to retirement
-- 30 percent say they have less than $10,000 in savings.
Just behind that group comes the baby boomers, with about
40 percent of that generation reporting less than $10,000
in savings.
So, what does Sen. Roth's proposal mean
for everyday wage earners and those who may not have the dollars
to squirrel away for retirement?
Raising the bar on contributions enforces
the idea that one can save more each year, says Glen Sulzer,
a tax analyst with CCH
Inc., a Richwood, Ill.-based publisher of tax information
and author of Working with 401(k) Plans.
"For some, it smells like a flat
tax and that it will only benefit the rich," Sulzer explains,
"but more people are investing heavily in the market,
regardless of their income level, and the incentive to save
looks even stronger."
Roth says many of the people who worry
about retirement say the laws on contributions to 401(k) plans
are too confining. "Why do we attach strings to savings
in this country?" Roth asks on his Web site. "We
should not be placing arbitrary and complex limits on saving
money (but) encouraging everyone to save as much as possible
with few restrictions and simple laws."
 |
| Sen. Roth |
Roth's 401(k) raises the question: Are
savers better off paying taxes on contributions now or later?
Experts say it depends.
"Who knows what type of tax system
we'll have in the future," Mosier says, "but the
advantage of being able to make 401(k) contributions on a
pretax basis, and the ability to defer taxes on the earnings,
allowing investment to compound over time, outweighs any benefits
of paying taxes up front."
Deferring
the decision
In the end, savers will have to decide which strategy
is best -- a decision most Americans wish someone else would
make for them.
A recent study by the 401k
Forum, a San Francisco provider of online 401(k) investment
advice and retirement planning, discovered that most American
workers don't want to make their own decisions regarding investing
for their 401(k) plans -- they want someone else to do it.
"American workers are desperate for
real, actionable advice, as well as education," says
Drake Mosier, chairman and chief executive officer of the
401(k) Forum. "Many American workers do not have the
patience, interest or desire to excel as their own investment
Advisers. They would rather go bass fishing."
-- Posted: Jan. 26, 1999
|
