From the January 2009 issue of Investment Advisor • Subscribe!

Obama's Retirement Agenda

A bevy of proposals will be weighed

Since the time is drawing nigh that the Obama Administration will be officially christened, it's important to refresh our memories about how the new Administration has proposed to handle retirement planning issues.

With his transition team in place and a Democratic majority in the Congress, Washington experts predict Barack Obama will hit the ground running once he becomes the next President. "We can expect a very quick start for the new administration and the new Congress in terms of pursuing their agenda," said Frank McArdle, head of Hewitt Associates' Washington, D.C., office during a recent Webcast on how the Obama Administration and the 111th Congress will deal with healthcare and retirement issues. Obama has vowed that his first priority will be getting the economy back on track, despite the fact that he'll face a budget deficit of nearly $1 trillion in 2009. McArdle noted that Obama has said "he's not concerned about the deficit in 2009 and even 2010," as his "primary focus is on getting the economy running smoothly again and for that reason, deficit spending is not only permissible but helpful."

Healthcare is also a key priority for Obama and for Congress this year. Plus, said McArdle, "There are also going to be significant tax policies that could directly or indirectly affect tax-favored employee benefits." Executive compensation, too, will be "in the forefront throughout 2009 with a variety of proposals likely to be enacted," McArdle said. Obama has also promised an economic stimulus bill. "That's of interest not only for how it will help the economy, businesses, and workers but for other provisions it might carry related to employee benefits," McArdle noted. "For example, right now for those of you who sponsor defined benefit plans there are a number of proposals to try and get temporary relief from the big increases in contributions that are now required because of the economic downturn and volatility."

Penalty-Free Withdrawals?

Obama also floated a number of proposals relating to defined contributions during his campaign that may actually see the light of day. Rob Reiskytl, who is in charge of Retirement Strategy and Design at Hewitt, detailed those proposals during the December Webcast. The first proposal, he said, would allow a penalty-free withdrawal from a tax-favored account like a 401(k) or IRA for tax years 2008 and 2009. "The amount of penalty-free withdrawal could be 15% of the account or no more than $10,000 in each of the withdrawals," Reiskytl said. Normally there's a penalty tax of 10% that applies to any withdrawal from a tax-favored account before age 59 1/2 , "so the proposal is to waive that penalty, not to waive the normal taxation that applies to these withdrawals, so an individual still faces federal and state income taxes."

Another proposal set forth by Obama would provide relief to those aged 70 1/2 who are mandated to take their required minimum distributions out of their tax-advantaged accounts. In mid December, both the House and Senate passed legislation that waives the required minimum distribution withdrawals for those aged 70 1/2 and eased pension funding rules. "There would be a corresponding temporary exemption from federal income tax in the situation where some employees decide to take out required minimum distributions. Normally there's a 50% tax levied on required minimum distributions that are not taken."

Obama's automatic retirement accounts proposal, would provide retirement accounts for those workers not offered a workforce plan. The contribution would be via a direct deposit and the employer would act as the forwarding agent. "The idea here is to facilitate payroll deduction into these accounts that are essentially an IRA--they could be just like an IRA but the details have yet to be worked out." Under the Obama plan, the government would provide a match on the first $1,000 contributed, Reiskytl said. However, according to this proposal families making more than $75,000 would not be eligible for the match.

Another series of proposals have to do with income taxes and other levies. Obama floated a proposal to raise the income tax on the two highest income brackets back to the early 1990s rates of 36% and 39.6%, Reiskytl noted. There's also a recommendation to increase the capital gains tax for the highest-paid workers--up to 20% from the current 15%, and a recommendation to expand the Saver's Tax Credit. "The new administration is considering an expansion of that credit so that it would be 50% on up to the first $1,000 contributed for any family earning up to $75,000. The current Saver's tax credit percentage varies between 10% and 50% with the largest percentage applying to the lowest-paid Americans," Reiskytl noted.

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