Obama's Retirement Agenda

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.