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Retirement-Saving Changes You Should Keep an Eye On

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By Janet Kidd Stewart

retirement_account_statement(MCT)—Retirement savers will have a few new wrinkles to contend with this fall as new policies take effect and Congress continues to battle budget woes.

Fledgling savers are likely to see new government-backed accounts, and some states are looking to roll out their own plans, while some of the bedrock benefits of existing savings vehicles are under fire.

Among them: Higher-income workers could lose some of the tax advantages of retirement accounts, and Roth individual retirement account owners could lose their exemption from required minimum distributions, or RMDs. Sub-six-figure IRAs could see RMDs disappear.

Here are a few issues to watch for as the summer doldrums give way to the post-Labor Day policy agenda:

New accounts. President Barack Obama’s previously announced myRA savings accounts are due to be launched, at least in a pilot phase, before the end of the year. The government-backed savings accounts for people making up to $129,000 a year ($191,000 for couples) are expected to be offered through employers who don’t already have a 401(k) plan.

The accounts will be administered by a private-sector company and are designed as starter accounts able to handle very small contributions. When balances reach $15,000, they’ll be rolled into Roth IRAs.

Critics of the plans point out that the very low interest rates earned on the accounts in order to provide the principal guarantee are a poor way to build long-term savings.

On the other hand, they could be a crucial first step toward retirement savings for many people, says David John, a senior strategic policy adviser for the AARP Public Policy Institute.

“This will allow that low-income or first-time saver the ability to build up an account without risk or fees,” John says.

After that step, John sees other new programs — like a proposed federal auto-IRA program he helped design, or similar programs in several states that would offer pretax payroll deduction savings plans — gaining traction.

“These state-sponsored plans are a recognition that failure to enable people to save money will end up costing the states money,” he says.

Scaling back. Obama’s 2015 budget proposal scales back some of the tax advantages of retirement savings accounts for higher-income workers, a move that, not surprisingly, has plenty of critics in the retirement savings industry.

The plan would cap the deduction for 401(k) and IRA contributions at 28 percent.

Because traditional 401(k) and IRA plans offer deferral of taxes, critics howled that the new scheme would tax those contributions twice — first at the time of contribution, and later when the money is withdrawn — leaving savers worse off than if they had simply put their money in taxable accounts.

A subsequent “fix” attempts to recognize the original tax paid, but the plan is still confusing and would require onerous record keeping by investors, argues Peter Brady, senior economist with the Investment Company Institute.

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