Tax Law Smiles on Retirement Plans
By: Jane Bryant Quinn
One problem: Almost everything is optional, but you don't get to choose. It's up to your company to decide what, if any, changes to make.
Furthermore, as the law now stands, all of the new plans and all the new rules end abruptly in 2011.
"That's an incredible provision," says Jacob Friedman, head of the tax department at the New York law firm Proskauer Rose.
Friedman doubts that most employers will bear the cost of analyzing all the new plans and changing their current plan documents until they feel more certain that the law will last.
Even then, the new plans are so complicated that Friedman will urge his clients not to adopt them. "Employers are still amending their plans from the last set of changes, passed four years ago," he told my associate, Dori Perrucci. "As things grow more complex, they become less useful."
For years, annual IRA contributions haven't been allowed to exceed $2,000 ($4,000 for couples). But starting in 2002, you'll be able to save up to $3,000 a year. That ceiling eventually rises to $5,000 in 2008.
These changes apply to both traditional IRAs and Roth IRAs.
Naturally, these new ceilings are relevant only for people who can afford to save more than $2,000 at a time. Around half of the savers with traditional IRAs contributed the maximum in 1997, according to a U.S. Treasury estimate.
Vesting. Employers will have to provide faster vesting for any matching contributions they make to their workers' retirement plans. This helps younger workers who migrate from job to job.
Rollovers. If you leave the job and your 401(k) is worth between $1,000 and $5,000, companies currently force you to remove the money from the plan. You can find your own IRA or simply pocket the cash. Most workers cash out and pay a tax.
Of the many other reforms Congress proposed for retirement savings, virtually all are optional. Here's what your employer might or might not do:
• Allow you to make higher contributions to your 401(k), 403(b) or 457 retirement plan, including extra sums for workers age 50 and older. As with the higher maximums for IRAs, this benefits only workers with money to spare. But the older you get, the more you'll probably try to save.
• Provide higher company contributions to worker plans.
• Make plans portable, so you can combine different types of savings into a single pot. Today, workers are often forced to manage a medley of different types of plans -- especially if they've worked in both the public and private sector, says James Delaplane, vice president for retirement policy at the American Benefits Council in Washington. That can be chaos.
• Set up retirement plans in small businesses for workers who never had one before. But whether the owners will really offer their workers more remains to be seen.
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