A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.
Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.
This was suggested by the chairman of the House Committee on Education and Labor.
“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,†Rep. George Miller, D-Calif., said.
“We’ve invested $80 billion into subsidizing this activity,†he said, referring to tax breaks allowed for 401(k) contributions and savings.
With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?†Mr. Miller said.
Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.
When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.
“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,†which goes to the highest-income earners, Ms. Ghilarducci said.
That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.
“If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,†Ms. Ghilarducci said.
Rep. Robert Andrews, D-N.J., raised the issue of which investment advisers are allowed to offer workers investment advice.
The Department of Labor is considering “loopholes†that would allow advisers to offer “conflicted investment advice if the advisers work for subsidiaries of financial services companies that sell the investments,†he said.
With American workers facing $2 trillion in losses from retirement plans over the past year and Democrats expected to gain seats in the House and the Senate, actions being contemplated by the committee are an important harbinger of what could come out of Congress next year.
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Things to consider before you move your 401k into an IRA
by Mike Rowan, eRollover.com
Typically when you leave a job, you should roll over your 401(k) to an IRA. Rollovers allow you to continue delaying taxes on your nest egg as it accumulates and avoid an early-withdrawal penalty. However, many people choose to leave their 401(k) with their old company, or roll it into their new company’s plan. There are several points to be aware of when making this choice with your 401k or 403b plan. Here’s how to decide if a 401(k) rollover to an IRA is right for you. Open a TradeKing account and get $50.
Think about fees and hidden charges
Americans transferred $195 billion from 401(k)-type plans to IRAs in 2006. But rollovers are a wise move for retirement savers only if the IRA charges lower fees than the 401(k) plan at the old or new job. Sometimes the IRA is a better deal, especially if the 401(k) is through a small business. But large companies often negotiate institutionally priced investments with lower costs than individuals can get on their own from retail IRAs. Low expenses make those 401(k)’s a much better place to keep your nest egg.
Rolling over a 401(k) to a high-priced IRA can cost you dearly, according to Hewitt Associates, a human resources consulting firm that processed more than 150,000 rollovers in 2006. A 35-year-old employee who changes jobs and leaves behind $33,000 in a 401(k) with typical institutionally priced investments can expect to have squirreled away $404,105 by age 70, according to Hewitt. If the same employee rolled the balance into a typical retail IRA (assuming in both cases an 8 percent annual return before fees are subtracted), he would have only $366,424 at 70. That’s a difference of $37,681. Open a TradeKing account and get $50.
Review the investment options in your 401k or retirement plan
IRAs almost always have more investment choices than 401(k)’s. The main reason for rolling it over into an IRA is diversification and more control over your retirement money. In an IRA, you can invest in individual stocks, bonds, and any mutual fund you want to. Savvy investors who already know they prefer low-cost index funds over exchange-traded funds, or vice versa, will enjoy the freedom of an IRA.
But retirement savers who aren’t likely to peruse their mutual fund prospectus might enjoy a smaller array of options already vetted by their employer or plan sponsor. Someone has limited the choices to a reasonable number and done a screen for you. You can do an asset allocation analysis with the funds that are offered and typically set yourself up just fine. If you are satisfied with the investments that you have, then you might want to leave your money there.”
Watch out for penalties.
If you are going to move your 401(k) to an IRA or your new 401(k) plan, you need to watch out for penalties. Job-hoppers can save themselves a lot of trouble—and money—by having the former employer send the cash directly to the new financial institution. You can do unlimited direct rollovers on an annual basis.
If you take the old 401(k) into your own hands, your employer will cut you a check for the balance, minus 20 percent withholding for income taxes in case you decide to keep the money. Then, you generally have 60 days to put the cash into a qualified tax-deferred account. If you don’t, Uncle Sam will keep the 20 percent (plus any additional amount you owe at tax time). This also means you have to come up with the absent 20 percent from another stash if you want to roll all of the distribution into an IRA. Only one rollover in this manner is allowed every 12 months.
Don’t Move Company Stock
Stock of the company you work for gets special tax treatment when held in an employer-sponsored 401(k). If there’s employer stock inside the 401(k), you may want to not roll that portion into an IRA.
Here’s an example: An employee buys $100,000 worth of company stock in his 401(k) plan, and it grows to be worth $1 million. If that stock is rolled over to an IRA, when it’s withdrawn, it will be taxed as ordinary income at a rate of up to 35 percent. Instead, Burkemper recommends that workers consider withdrawing the stock from the retirement plan. The original $100,000 investment would be taxable as ordinary income in the year of the distribution. But there is no tax on the $900,000 stock appreciation until it is sold. And then it would be taxed at the long-term, capital-gains rate of 15 percent. That would save the hypothetical borrower in this example $180,000 in taxes, assuming that income and capital-gains tax rates stay the same. If you roll it over to the IRA, that tax benefit is gone.
Think about Loan options for 401k and IRA Plans.
Loans on your 401k or your retirement stash to cover current expenses is never a good idea. But if your back is up against the wall financially, you can generally take loans only from a 401(k) and not from an IRA. If you roll it over to an IRA, the only way you can get access is to pay taxes and the penalty.
Estimate your retirement age.
With an IRA, there is a 10 percent penalty if you make a withdrawal before age 59½. But retirees can begin taking penalty-free 401(k) withdrawals at age 55. If you’re 56 and think you might need access to a 401(k), you may not want to move it. This can be circumvented by utilizing the substantially equal distribution provision, otherwise known as 72t, where you can access your money, but have to take the same amount for 5 years or age 59 1/2. Open a TradeKing account and get $50.
At age 70½, retirees must take required minimum distributions from their retirement accounts. There’s one exception: If you’re still working, you don’t have to take the distribution from a 401(k)—and pay the extra taxes that year—unless you own more than 5 percent of the company.
Consider your heirs with regards to Estate Planning
Most 401(k) plans will force your heirs to take the assets soon after you die, which can be a big tax burden on your loved ones. Some 401(k) plans allow only spouses to roll inherited 401(k) dollars into an IRA. If you’re going to stay in the plan, you better make sure it allows you to do a nonspousal rollover into an IRA. IRAs typically give retirees more freedom to allow heirs to take required minimum distributions instead of a lump sum and make it easier to set up multiple beneficiaries. If your employer’s 401(k) plan doesn’t make it easy for your heirs to space out the tax payments, you might want to roll over the money into an IRA.
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eRollover.com Education Center
by Mike Rowan, eRollover.com
eRollover.com, the web’s leading portal for 401k, IRA, Retirement, and Personal Finance, has added a new feature on our site to help our members and visitors become more comfortable with all financial topics. With eRollover’s Education center, we have aggregated numerous topics about personal finance and retirement that are commonly sought out by our users and readers.
In addition, we would like to make this a place where our members can also submit their own content, so that this database of financial information is always up to date and displaying the type of financial data that our readers are striving for.
Please check out eRollover’s Education Center, and email any information you think should be included to info@erollover.com.
Introducing The eRollover Education Center!
eRollover is proud to introduce our education center, where you can find useful information on all types of 401k, 403b, Retirement, Investing, Insurance, and other Personal Finance topics!
