Most of the changes take a trickle-down approach, especially for small-company plans. They give richer options to the boss, in hopes he or she will pass the beneficence down the ranks. On the off chance the boss doesn’t help you out, the law offers workers a few direct tax savings, too. Taken together, these new rules give you an early look at the kinds of tax breaks that boomers are going to want a lot more of:
Larger maximum contributions to 401(k)s, 403(bs), Keoghs and other retirement plans. Today your account can receive up to 20 percent of your earnings (to a maximum contribution of $30,000, including whatever money your employer adds). Starting in 1998, that rises to 25 percent plus whatever you put in a company child-care or health-care account. Maybe you won’t have the money to spare, but it’s a great offer for those who do. On a $40,000 salary, you and your company will be able to contribute as much as $10,000, compared with $8,000 today.
Help for people in middle age who need to start saving serious money. Some workers have well-funded pension plans but minimal savings in a tax-deferred 401(k). Others are faithfully stashing the max in their 401(k)s, yet not building anything close to the nest egg they’re going to need. You can have both types of plans, but at present you can’t get top dollar from both.
In 2000, the rules will change. Workers in old-fashioned pension plans will be able to fund larger 401(k)s. Workers with solid 401(k)s will be able to climb into pension plans. It’s up to the company to decide which options to offer – but I expect a pension revival among successful small-business owners who don’t have a lot of employees. In late middle age you can start a fixed-benefit pension plan that lets you contribute, and tax-defer, 50 percent or more of your salary every year.
A break for people who labor into older age. Of all the people at work today, only 1.3 percent are 70 or older. But those earning graychecks are sure to rise, as low-saving boomers discover they can’t afford to quit. Today you have to start taking money out of your company savings plans at 70i, even if you’re still employed. Starting next year, however, you can wait until retirement. If you leave your plan untouched for four extra years, you’ll have 24 percent more to retire on, says consulting actuary Bruce Temkin of Louis Kravitz & Associates in Encino, Calif.
Mandatory withdrawals will still start at 70i for people who own at least 5 percent of the business and for any money in Individual Retirement Accounts. If you stop work but hope that the company will rehire you part-time, leave your money in the plan instead of rolling it into an IRA.
Better IRAs for spouses at home. Today one-earner couples get up to $2,000 plus $250 for a spouse. Next year it’s $2,000 each – just what working couples have.
Better plans for tax-exempt groups that don’t qualify as charities. This includes credit unions, real-estate boards, fraternal orders, chambers of commerce and many others. They’ve generally been limited to IRAs or traditional pensions. Now they can also have 401(k)s.
Better benefits for union members. Under many union plans, you don’t earn a pension until you’ve worked for at least 10 years. Nonunion plans, by contrast, can’t make you wait any longer than five years. The new law imposes five-year vesting on unions, too – starting in 1997 or 1998, depending on the contract year.
A tax break for people with super-rich retirement accounts. At 70i you normally have to start taking money out of your plan, at a rate that will deplete your savings over a preordained number of years. At any age, you owe income taxes on withdrawals. There’s also a 15 percent excise tax on amounts over $155,000 (indexed to rise with inflation each year).
The new law waives that excise tax from 1997 through 1999. So if you want to spend extra money or give some of your savings away, those will be excellent years to do it, says Peter Elinsky, a tax partner with the consulting firm KPMG Peat Marwick. Otherwise, it’s smarter to leave the money in. The money you earn by deferring the income tax usually more than covers the cost of the eventual excise tax. A bonus: your heirs get several years of tax deferral, too.
A new small-company retirement plan – the Savings Incentive Match Plan for Employees (SIMPLE, if you believe acronyms). It lets the boss set aside up to $12,000 for himself, even if no employees join. If they do, however, he has to contribute something to their accounts. You might call this a stealth plan. It’s best for the boss if the workers don’t understand it and don’t bother to join. If they do join, it may cost more than the company wants to pay. Patrick Byrnes, president of Actuarial Consultants in Torrance, Calif., predicts that SIMPLEs won’t catch on.
Bigger tax-deferred plans for husbands and wives who run a company together. Current pension law doesn’t treat such couples as separate savers; if unmarried, their company plans could receive as much as $30,000 each. Married, the $30,000 has to be split between them every year. That stops one spouse from giving the other a phony job just to create a retirement-plan deduction. But it gives no credit to spouses who really pull their weight.
Starting next year, owner-spouses each get a full contribution of their own. With high enough salaries, you could double the money you jointly set aside. You’ll also be able to hire your young children and fund separate pensions in their names. Phony jobs will probably reappear, which the IRS won’t catch unless somebody rats. But the boomers have made the working couple a commonplace, and they want every benefit it brings.
