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Sponsor News - April 2011

Many Miss Out On Retirement Tax Credit

BOSTON (TheStreet) -- A federal income tax credit of up to $2,000 may be overlooked by most Americans with retirement plans who can take advantage of it.

The Saver's Credit is designed as an incentive for low- to middle-income workers to save for retirement. But, according to the Transamerica Center for Retirement Studies, very few workers who may be eligible may even know it exists. Even though it was introduced a decade ago, only 12% of full-time workers who could benefit know of the Saver's Credit, a survey shows.

The Saver's Credit may be applied to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k) or similar employer-sponsored retirement plan or IRA. Credits of up to $1,000 for single filers and $2,000 for married couples are offered.

But only 12% of full-time workers with annual household incomes of less than $50,000 are aware of the credit, according to a survey conducted by the center of 3,598 full-time and part-time workers.

"There are people who meet the income eligibility requirement and are saving through a 401(k) plan who could be claiming the credit, but they just don't know about it," says Catherine Collinson, president of the center, which is funded by contributions from Transamerica Life Insurance.

The center is advocating improved outreach.

"It seems like over time it has gotten lost in the shuffle," she says of the credit. "It was introduced all the way back in 2001 and made permanent in 2006 with the Pension Protection Act. It is there and available, but I think the outreach has just moved on to other tax credits and other types of things."

Taxpayers can only claim the credit on Forms 1040A, 1040 and 1040NR.

"One of the concerns is that, especially for people saving in a 401(k) plan, it is not reflected on the 1040EZ form," Collinson says. "Lower- to middle-income workers are probably the most likely of all income levels to use the 1040EZ form, and because there's no place to put it on the form, they may be completely missing the tax credit ... and are simply not aware of it."

How to claim the credit
The credit is available to workers who have contributed to a company-sponsored retirement plan or IRA in the past year. Single filers with an adjusted income of up to $27,750 last year or $28,250 this year are eligible. For the head of a household, the adjusted income limit is $41,625 last year and $42,375 this year. For those who are married and file a joint return, the adjusted income limit is $55,500 last year or $56,500 this year.

The filer cannot be a full-time student or be claimed as a dependent on another person's tax return.

If you are using tax preparation software to prepare your tax return, use Form 1040A, Form 1040 or Form 1040NR. If prompted, be sure to answer all questions about the Saver's Credit, Retirement Savings Contributions Credit and Credit for Qualified Retirement Savings Contributions.

If you are preparing your tax returns manually, complete Form 8880, the Credit for Qualified Retirement Savings Contributions, to determine the exact credit rate and amount. Then transfer the amount to the designated line on Form 1040A, Form 1040 or 1040NR.


Why Don't the Folks in Charge of Your 401(k) Plan Realize You Can't Retire?

Jane White, Author, "America, Welcome to the Poorhouse"

How many times have you seen articles with the headline, "As Baby Boomers Prepare to Retire..." compared to articles entitled "Baby Boomers Aren't Prepared to Retire?"

As I've pointed out before, 90% of Baby Boomers in the private sector can't afford to retire because they are dependent on a 401(k) plan whose measly employer contribution rate of 3% of pay is so low most people won't have accumulated enough. (This is also true for their younger counterparts but the you-know-what hasn't hit the fan for them yet.) However, most Americans don't realize they're in a pickle because the folks who manage or advise you on your 401(k) investments aren't required to communicate this shortfall to you. Despite the passage of -- and multiple amendments to -- the Employee Retirement Income Security Act, not only has retirement security vanished in the U.S. but we're left spinning in the dark.

At the same time, while the mutual fund industry has rolled out investment products called "target date funds" that automatically shift from stocks to fixed income investments as participants get closer to retirement age, the folks that run the funds don't define a target AMOUNT as a multiple of your salary and how much you need to sock away to hit the bulls-eye. Last week the Investment Company Institute, the trade organization representing mutual funds, issued a report on a survey showing that households " were generally confident in these plans' ability" to help them meet their retirement goals, but there was no mention of what that goal should be based on an individual's pay check nearing retirement. As I've discussed in previous blog posts, the formula developed by pension actuaries is that you need to have accumulated a multiple of at least 10 times your salary at retirement.

Not only do these so-called stewards of 401(k) assets not know the formula for retirement adequacy, one of them censored my attempt to shed a light on this ignorance. After I submitted my column for an employee benefits publication in which a high-ranking official at a mutual fund admitted he had no idea how much 401(k) participants needed to save, the next day the company told my editor that they would withhold any future advertising in that publication if the publication published my interview with the official.

Even those outside of the mutual fund industry who are paid to advise 401(k) participants don't seem to know the formula. For example, the only advice Financial Finesse appears to give employees is to "shoot for 80% of your current income," as if 80% of one year's wages could magically last a couple of decades. (A Financial Finesse spokeswoman didn't respond to my query.)

As I testified before the Department of Labor in 2007, with the input of pension actuary James Turpin, assuming a typical employer contribution rate of 3% of pay, the only way to reach retirement adequacy without banking a huge chunk of your paycheck is to start contributing at age 25 and save 10% of your salary. The longer the participant postpones saving, the greater the required contribution. For example:

  • Waiting until age 35 increases the contribution rate to more than 17% of pay
  • Waiting until age 40 increases it to more than 23% of pay.
  • Finally, waiting until age 50 requires a nearly five-fold increase from the rate at age 25, to 48% of pay Needless to say, this over-50 requirement flies in the face of the meager current5,500 limit on "catch-up contributions" currently allowed by the IRS.

Senator Tom Harkin, chairman of the Senate Health, Education Labor and Pensions Committee, has said that he intends to make retirement security a priority in 2011: "Over the coming year, I plan to hold a series of hearings examining the crisis in retirement security from a number of different angles." Harkin has also supported requiring mutual fund companies to at least tell 401(k) participants what kind of income stream they can expect from their account balances. Since the typical Boomer has saved around $120,000 and a $100,000 nest egg will only produce an income stream of $333 a month, or around $82 a week, they're going to be hurting.

I'm urging readers to get Congress to take action this year, specifically by going to my website:, click on the link on the upper right hand side: "Stop the 401(k) Nightmare" and send the link to your Congressperson.


6 Ways to Measure the Success of a 401(k) Plan

By Emily Brandon

Posted: January 31, 2011

  • When companies set out to measure how successful their 401(k) plan is, they generally don't do it based on how comfortably their former employees are supporting themselves in retirement. Instead, employers evaluate how many employees use the plan and whether the benefits offered are competitive with other companies in the same industry. Here is how you could potentially measure the success of a 401(k) plan.

Participation rate. Employers generally measure retirement plan success by calculating the percentage of workers who participate in the 401(k) plan (84 percent), according to a MetLife, Mathew Greenwald and Associates, and Asset International Inc. survey of 127 Fortune 1000 plan sponsors. Companies pay particular attention to whether non-highly compensated employees are utilizing the plan (81 percent).

Savings rate. Almost all 401(k) plan sponsors (93 percent) say that promoting retirement savings is an important objective of their retirement plans. Many employers closely track how much lower income workers are saving for retirement (76 percent). However, less than half (45 percent) of employers evaluate their retirement plan based on the average 401(k) balance. And companies are evenly divided about whether employees are accumulating sufficient assets in their retirement plans' percent agree and 42 percent disagree.

[See 10 Winter Wonderlands for Retirement.]

Projected retirement income. Workers must transition their nest egg into a stream of retirement income largely on their own. Only about a third (35 percent) of Fortune 1000 companies say one of their primary objectives is to help employees create retirement income for the future. And 82 percent of the employers surveyed say their company does not set income replacement goals for their employees in retirement. Many companies say they are concerned about their employee's ability to generate retirement income (52 percent).

401(k) match. Employers are also concerned about the proportion of employees taking advantage of the 401(k) match (72 percent). When asked what improvements they would most like their company to make to the retirement plan, the most popular answer was to increase company contributions to the 401(k) (20 percent).

[See 5 Ways to Make Your 401(k) Balance Last Longer.]

Employee satisfaction. Few employers evaluate employee satisfaction with their retirement benefits. Only a third (34 percent) of plan sponsors have conducted an employee survey to gauge how satisfied employees are with the education and support they receive about their retirement plan.

Competitiveness with other employers. Offering a 401(k) is largely about recruiting and retaining talented workers. Many companies say they provide retirement benefits primarily to attract the best employees in the most cost-efficient manner possible (45 percent), MetLife found. Some companies also say their business needs are served by offering financial resources to support employee retirement goals (20 percent).


ROTH 401(k)s In the Spotlight: Should You Amend Your U.S. 401(k) Plan?

Posted on February 9, 2011 by Carol Buckmann 

More than one third of employers offer ROTH 401(k) contributions as an option in their 401(k) plans, according to a recent AON Hewitt survey, and an additional 38% of those remaining indicate that they will add them in 2011. After languishing for years, ROTH contributions have taken off at least partly because of 2010 changes in the US tax rules. Plan sponsors should consider the pros and cons of this option.

What are ROTH 401(k)s?

ROTH 401(k) accounts are similar to ROTH IRAs. Contributions are made on an after-tax basis and provided they are kept in the plan or IRA for a prescribed period of time, no amount, including any appreciation and earnings, is subject to income tax on distribution. However, ROTH IRA contribution limits are lower than ROTH 401(k) limits, and ROTH IRA contributions phase out completely at higher income levels (though conversions may circumvent these rules). ROTH 401(k) contributions reduce the maximum pre-tax deferrals otherwise permitted to be made by employees ($16,500 in 2011, or $22,000 if the employee is 50 or older) dollar for dollar and are subject to the same distribution restrictions as pre-tax deferrals.

New Conversion Option

Under current law, distributions from qualified plans can be rolled into ROTH IRAs and traditional IRAs can be converted to ROTH IRAs regardless of income level. As a result of a law enacted in 2010, participants in 401(k) plans were given a similar right to convert their plan accounts into ROTH 401(k) accounts without taking a distribution and without regard to their income levels. Conversion is a taxable event, but it permits post-conversion appreciation and earnings to escape tax. 401(k) conversions can greatly increase the amounts eligible for ROTH tax treatment.

IRS Guidance

Plan participants are now permitted to convert existing pre-tax plan accounts, including amounts representing employer contributions, to ROTH accounts, provided that their plan permits conversions and subject to some important conditions.

  • IRS guidance permits conversions only if the amount could otherwise be paid to the participant currently as a distribution. This means that pre-tax contributions and employer 401(k) safe harbor contributions are permitted to be converted by an active participant only at or after age 59 %uFFFD. However, employer profit sharing contributions and rollover contributions are not subject to this restriction, and plans may be amended to permit conversions of those accounts without permitting actual withdrawals.
  • IRS says that a plan may not permit ROTH conversions unless participants are entitled to make ROTH contributions out of their pay, so a plan may permit ROTH contributions without allowing conversions, but it cannot permit conversions if ROTH contributions are not allowed.
  • Finally, IRS has given sponsors until the end of the year in which ROTH conversions are permitted to amend their plans to permit ROTH conversions, though special rules apply to safe harbor plans.

Why add this feature?

  • The tax shelter from the ROTH contributions can be substantial, particularly for younger employees who have potentially many years of future earnings and appreciation.
  • Employers can match ROTH contributions on the same basis as pre-tax deferrals.
  • ROTH accounts and ROTH conversions permit some attractive estate planning strategies.
  • Although current tax is payable on any converted amount, asset values may be lower today due to the economy. Further, employees may be paying tax at lower rates than they estimate they will be paying when they take distributions, which is the taxable event for plan accounts that aren't converted.
  • Outside vendors can handle disclosure and administration of ROTH accounts and conversions.

What are the disadvantages?

  • Plan sponsors will have to amend their plans, and will have to explain the differences between the available contributions to employees, the pros and cons of conversions (if they are permitted) and to keep separate records of ROTH accounts while applying specific ordering rules.
  • Like pre-tax deferrals, ROTH contributions may be subject to discrimination testing if the 401(k) plan is not a safe harbor plan.
  • It is possible that the plan may be amended and new expenses incurred for only a few participants.
  • Earnings will be subject to income tax and in many cases an additional 10% penalty if the amounts in ROTH accounts (including converted amounts) are withdrawn prior to the end of a five year holding period or are withdrawn prior to age 59 1/2, death or disability.
  • Cash is needed to satisfy the tax liability. Unlike a ROTH IRA conversion, a 401(k) plan ROTH conversion can't be reversed and tax liability is not adjusted if the value of the transferred assets subsequently declines.