Dear Tax Payer,
As promised in his State of the Union address, President Obama has taken executive action and directed the Treasury Department to create a new retirement savings vehicle called a “myRA.” A White House spokesperson described a myRAs as being simple, safe, and affordable starter savings accounts to help low- and moderate-income taxpayers save for retirement. This commentary takes a closer look at how myRAs will work and also highlights the President’s other previously raised retirement-related proposals that he mentioned in his speech.
Background on 401(k) plans. Cash or deferred arrangements, popularly known as “401(k)” plans, allow an employee to choose whether the employer should pay a certain amount directly to the employee in cash, or should instead pay that amount on the employee’s behalf to a qualified trust under a profit-sharing plan, a stock bonus plan, a pre-ERISA money purchase plan, or a defined contribution pension plan.
For 2014, an employee may elect to defer a maximum of $17,500 on a pre-tax basis under a 401(k) plan and individuals who attain age 50 by the end of the plan year may make, if their plan permits, additional pre-tax “catch-up” contributions of up to $5,500.
The employer may or may not provide matching contributions to the amount deferred, as provided for in the plan, and may make matching contributions subject to a vesting schedule. Employee contributions, as well as employer matching contributions, must satisfy detailed tests.
Background on IRAs. An eligible individual who isn’t an active participant in certain employer-sponsored retirement plans, and whose spouse isn’t an active participant, can deduct, for a tax calendar year, cash contributions to an IRA for that year, up to the lesser of: (1) $5,500 for 2014, plus a catch-up contribution, if eligible, or (2) 100% of the compensation that’s includible in his gross income for that year. Active participants in a retirement plan also can make contributions to an IRA, but their deduction for the contribution is limited if their adjusted gross income exceeds a specified amount.
HATS observation: There are many different IRA types. The above is only a very basic background on traditional IRAs.
Early withdrawal penalty. Early withdrawals (i.e., those taken before the individual attains age 59 1/2) from a qualified retirement plan, such as an IRA or 401(k), result in an additional tax equal to 10% of the amounts withdrawn that are includible in gross income. The additional tax applies to all withdrawals unless specifically exempted under certain relief provisions.
New myRAs. According to the fact sheet, approximately half of all workers and 75% of part-time workers lack access to employer-sponsored retirement plans, which are thought of as the most effective way to save for retirement. The myRA, which will be available through employers, is intended to help these taxpayers save for retirement.
MyRA include the following features:
… Principal protection. Savers “will benefit from principal protection, so the account balance will never go down in value.” The accounts are backed by the U.S. government similar to savings bonds.
… No fees. 100% of savers’ contributions go into the account.
… Tax-free withdrawals at any time. Contributions to a myRA can be withdrawn tax-free at any time.
… Portability. Savers can keep the same account when they change jobs and also have the option of rolling over the balance into a private-sector retirement at any time.
… Low investment barriers. Savers can start an account with an initial investment as low as $25, and contributions as low as $5 can be made through automatic payroll deductions.
… Return on investment. A myRA account will earn interest at the same variable interest rate that federal employees receive through the Thrift Savings Plan (TSP) Government Securities Investment Fund.
… Income threshold. Taxpayers in low- and middle-income households earning up to $191,000 per year will be eligible to have a myRA account.
… Maximum balance/term. Participants can save up to $15,000, or for a maximum of 30 years, in their myRA account before transferring the balance to a private sector Roth IRA.
… Low cost to employers. The accounts are “little to no cost and easy for employers to use” since employers neither administer nor contribute to the accounts.
Please feel free to contact our office if you wish to discuss your specific retirement concerns. Our affiliate investment advisor, Optimal Wealth & Investments, would be happy to meet with you to answer your questions and make recommendations regarding your retirement goals.
Dean R. Holland, CPA