Q: What changes are in store for 401(k) and 403 (b) retirement plans?
A: Named for the section of the federal tax code that created these popular savings tools, Congress recently updated the law that allows workers to divert a percentage of their paychecks tax-free into these plans to build up savings for their retirement. Unlike company-run defined benefit pensions, 401(k)-type savings plans allow workers more direct control over their retirement nest eggs. As the chief tax mechanic in the U.S. Senate, I have long sought to strengthen retirement security and savings opportunities for working Americans. Using the federal tax code as a vehicle to encourage workers to sock money away for retirement, I helped secure generous savings incentives in the 2001 tax laws, including: increased contribution limits for 401(k) plans and IRAs; creation of “catch-up” contributions for workers age 50 and older; and, a first-ever saver’s tax credit for lower-income workers. As the 109th Congress considered ways to troubleshoot weaknesses in the nation’s pension-funding laws, I won efforts to make permanent the pro-worker, tax-advantaged savings incentives I helped create five years ago.
Q: What tax-favored savings incentives will become permanent?
A: Starting in 2008, w
orkers will be able to make a tax-advantaged
contribution of up to $5,000 into Individual Retirement Accounts
(IRAs). Even better, the change is indexed for inflation to retain its
value. If Congress didn’t act, the annual IRA contribution limit would
have reverted to $2,000 by 2011.
Workers age 50 and older will be allowed to make additional $1,000 “catch-up contributions” to IRAs each year and up to $5,000 contributions each year to 401(k) plans to grow their nest eggs.
Increases to the contribution limits on 401(k) plans will rise to maximum
$15,000 in 2006 and are indexed to inflation going forward.
The saver’s tax credit aimed at lower-income workers was set to expire in 2006. Now the tax credit of up to $2,000 that has encouraged millions of taxpayers in the bottom tier of the wage scale to jump-start their retirement savings will continue to propel people to prepare for a more secure retirement.
Q: What other pension-related changes are in store for workers?
A: My first piece of advice: Pay careful attention to information distributed by your employer’s benefits department. The new law prods employers to automatically enroll employees in a 401(k) plan. Workers will be given the choice to opt out with written consent instead of requiring a signature to enroll. This ought to help younger workers get a head start on their retirement savings. The new law also gives employers the green light to automatically increase an employee’s pre-tax contributions and steers companies to increase the percentage of their matching contributions. Finally, the new law will allow employers to maximize their workers’ 401(k) earning potential by choosing broadly diversified investments. Too often workers would park their money in a low-risk, low-yield instrument. That doesn’t always make the most sense. New rules will allow employers to customize investments based on age, expected retirement date and risk among other factors.
It's a good thing Congress shifted gears on pension rules to give workers a better opportunity to accrue more savings for a more secure retirement.