Roth Authors New Legislation to Promote Secure Retirements
Will Introduce Bill With Expanded IRAs and Pensions Later this Month
WASHINGTON -- Building on the success of the Roth IRA, Senate Finance Committee Chairman William V. Roth, Jr., today announced his intention to introduce a bill this month to help Americans save more for retirement in both private savings plans and employer-sponsored retirement plans.
"Nearly half all Americans report that they have less than $10,000 in savings. Of people aged 51 to 61 -- those ages just prior to retirement -- 30% have less than $10,000 in savings. And close to 40% of baby boomers have less than $10,000 in savings," Roth stated. "We need to alleviate this problem by providing more incentives for Americans to save for their retirement.
"I hear from Americans every day who say that the laws on pensions are too restrictive, and prevent them from saving as much as they would like. Why do we attach strings to savings in this country? We should not be placing arbitrary and complex limits on saving money. We should be encouraging everyone to save as much as possible with few restrictions and simple laws," Roth stated. "That is why I am proposing this legislation.
"If we can increase savings, we can not only help individuals with their retirement and alleviate some of the pressure on Social Security, but we can help keep our economy growing. This bill, together with my Personal Retirement Account bill, will help all Americans build a secure retirement and a strong future for the country."
The new Roth pension and private savings expansion legislation would include provisions to:
• Create the "Roth" 401(k) and 403(b) plans. Modeled on the Roth IRA, this provisions would allow individuals to contribute after tax money to a 401(k) or 403(b), and remove the money tax free on retirement.
• Increase the contribution limits on all IRAs to $5000 (from $2000). The maximum contribution limit for the IRA is $2000, which has never been indexed for inflation. If the IRA limit was indexed for inflation, today it would be $4,930.
• Increase other pension plan limits. 401(k) plans and 403(b) plan annual maximum contribution would be increased to $15,000; SIMPLE plans would be increased to $10,000 annual maximum contribution.
• Eliminate income caps on IRAs. Before 1986, all Americans, regardless of income, could save in a tax favored IRA. Roth's legislation would eliminate all income caps on IRAs to allow all Americans to save in a Roth IRA or a traditional IRA.
• Allow "catch up" contributions for workers returning to the workforce. Parents who take time off from work would be allowed to contribute more to their pension plan after age 50 to "catch up".
• Increase pension options for small businesses.
A more detailed summary is attached.
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RETIREMENT SAVINGS OPPORTUNITY ACT OF 1999
To Be Introduced By Senator William V. Roth, Jr.
In order to address the issue of baby boomers and others not having enough savings to address their financial needs during retirement, I will introduce the Retirement Savings Opportunity Act to give these working Americans the opportunity to save more for retirement. Provisions of the bill are as follows:
Increase IRA Dollar Limit. The maximum contribution limit for IRAs is $2,000, which has never been indexed for inflation. If the IRA limit was indexed for inflation it would be $4,930. The IRA limit will be increased to $5,000 per year. In addition, this limit will be adjusted annually for cost of living increases, in $100 increments.
Increase Other Dollar-Based Benefit Limitations. Currently, the maximum pre-tax contribution to a 401(k) plan or a 403(b) annuity is $10,000. In addition, the maximum contribution to a SIMPLE plan (a simplified defined contribution plan available only to small employers) is $6,000. Both the $10,000 limit and the $6,000 limit are indexed for cost of living increases. There has traditionally been a differential in contribution limits among the various types of plans: IRAs (which are individual plans) having the lowest limits; SIMPLE plans having a greater limit -- but not as much as a 401(k) plan; and 401(k) and 403(b) plans having the highest limits, but the greatest number of regulations. The bill will increase limits for 401(k) and 403(b) plans to $15,000 and for SIMPLE plans to $10,000, since the IRA limit will be raised to $5,000; thereby continuing the differential.
Increase IRA Income Caps. There are different caps on contributions to traditional and Roth IRAs. They are as follows:
Tax Deductible Contributions to Traditional IRAs. If an individual is an active participant in an employer provided pension plan, the amount of a deductible contribution that can be made is reduced if the adjusted gross income of the taxpayer is over $50,000, if filing a joint return, or $30,000, for all other filers. These income limits are scheduled to increase annually until the year 2007 when the joint filer limit will be $80,000 and the single filer limit will be $50,000. Married filing separately taxpayers, are precluded from making deductible contributions if their adjusted gross income is above $10,000. In addition, if an individual is not an active participant and the individual's spouse is, the income limit is $150,000. The bill will eliminate these income limits for deductible IRAs.
Contributions to Roth IRAs. A full $2,000 contribution can only be made to a Roth IRA if a single taxpayer's adjusted gross income is less than $95,000 and married taxpayer's adjusted gross income is less than $150,000. The bill will eliminate these income limits for Roth IRA contributions.
Conversion to Roth IRAs. In order to convert to a Roth IRA, a individual's adjusted gross income must not exceed $100,000, regardless of whether the individual is married filing jointly or single. Married individuals who are filing separately cannot convert to a Roth IRA. The bill will raise the income cap for conversions to $1 million.
Catch-Up Contributions. This provision will provide an additional savings opportunity to those individuals who are close to retirement. The bill will give those who are age 50 the opportunity to contribute an additional amount in excess of the annual limits equal to an additional 50% of the annual limit. For IRAs, this will mean that someone age 50 could contribute $7,500 each year rather than $5,000. These additional catch-up contributions will not be subject to the normal non-discrimination rules for other contributions.
Elimination of 25% of Compensation Limitation. Currently, the maximum amount that can be contributed to a defined contribution plan on behalf of an individual participant is the lesser of $30,000 or 25% of compensation. This includes both employee contribution and any matching contributions or profit sharing contributions made by the plan sponsor. This bill will eliminate the 25% of compensation limit, so that the maximum contribution that is made on the behalf of any individual is $30,000.
Roth 401(k) or 403(b) Plan. The bill provides that companies can give participants in 401(k) plans and 403(b) plans the opportunity to contribute to these plans on an after-tax basis, with the earnings on such contributions being tax-free when distributed, like under the Roth IRA. More than the maximum Roth IRA contribution amount can be contributed under this option; employees would be limited to the maximum 401(k) or 403(b) contribution amount. The regular distribution rules (rather than the Roth IRA distribution rules) for these types of plans would apply.
IRA Contributions to an Employer Plan. The bill gives employers the opportunity to accept traditional IRA contributions as part of their regular employer plan. In addition, it gives employees the ability to have IRA contributions made directly to the employer-sponsored IRA as a payroll deduction. The advantage of using an employer plan as an IRA account is that the administrative costs in an employer plan are usually much less than the costs in a privately maintained plan.
Full Funding Limit Increase. Defined benefit pension plans are also an important source of retirement income. Currently, amounts that can be deducted as contributions to a pension plan is limited to 150% of the current liability amount of the plan. The current liability amount does not take into account projected pension benefits. This limitation is eliminated in this bill.
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