IRA, Roth IRA and 401(k) Retirement Saving Accounts- Part I of a II Part Article

For Part II of this article please see IRA, Roth IRA and 401(k) Retirement Savings Accounts-Part II

(6/4/01)-On the face of it, the proposals in the pending retirement-savings bill recently passed by Congress seems to be all positive. Upon closer scrutiny however several questions arise as to exactly how big a plus the legislation actually is for the average worker.

One of the items would increase the maximum yearly contribution to an IRA account from $2,000 to $5,000. The maximum will rise to $3,000 beginning next year through 2004, to $4,000 in 2005 through 2007, and then to $5,000 in 2008, and thereafter with increases for inflation in $500 increments.

The maximum amount to be contributed to a 401(k), 403(b) and 457, or tax deferred retirement plans would be increased in stages. It would be increased from $10,500 this year to $11,000 next year. The maximum amount would go up to $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000 in 2006, with the maximum indexed for inflation in later years.

People over 50 years of age would be allowed to increase their contributions up to both their I.R.A.s and to retirement plans like 401 (k)s. People over 50 would be allowed to put an additional $500 in their I.R.A. account next year and $1,000 each year thereafter till the maximum of $5,000 is reached.

For plans like the 401 (k), those 50 and over could save an extra $1,000 next year, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005 and $5,000 in 2006 and subsequent years. Congress also increased the maximum amount of income that can be counted for retirement benefits. This particular provision benefits owners and higher paid workers the most. Only about 60 % of those eligible contribute to their I.R.A. account according to Employee Benefit Research Institute in Washington.

Once we begin to closely study all of the provisions of the bill however we see that not everything is so clear-cut. When we examine the figures we see that only 5% of 401(k) participants now contribute the maximum to their accounts. It is even worse for IRA accounts where only 4% of eligible participants contribute the maximum to their plans.

Some government officials are worried that some of the other provisions in the legislation would roll back some of the protections afforded to lower income workers under such plans. Under present "non-discrimination" laws covering 401(k) plans, about 70% of employees who earn less than $85,000 are covered. The proposed legislation would reduce that coverage to somewhere between 20 to 50% of those workers. "Top-heavy" rules require that if 60% or more of the money in a plan is in the accounts of owners and officers, the employer must contribute 3% of their pay to the accounts of other employees and have it vest it within 3 years. The proposed law would eliminate "top-heavy" rules in some retirement accounts and dilute them in others.

It is further argued that the catch-up provision in the law would really benefit the rich not the average worker who is having trouble meeting his bills, whether he or she is over or under 50 years of age. Certain provisions in the legislation would help employers fight legal challenges to the changes made in computing pension amounts using the "cash-balance" computations. The change over to cash-balance computations has in effect hurt many of the older workers under the company's plan while in effect helping the younger workers. Some of the other provisions in the legislation would stop requiring companies to provide detailed pension documents automatically to their workers.

All these questions that we discuss therefore mean that we should study the potential legislation with much greater scrutiny. One of the truths that our parents taught us was "All that glitters is not gold".

For additional information on this topic, please see our article "IRA, Roth IRA and 401(k) Plans"


By Allan Rubin
updated June 4, 2001

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