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Retirement Savings Gets A Boost From Feds’ New 401(k) Rules

Your retirement savings were helped by the federal government’s just announced increases to the contributions of 401(k) plans.

For those looking to focus more on their retirement savings in 2015, the federal government has announced rule changes and is the process of implementing a new investment program by the end of the year.

For most of us that have 401(k) contribution plans, the federal government, starting in 2015, has increased the amount we can contribute a year to $18,000, a $500 gain over 2014. Those 50 and older will have an extra $500 they can contribute a year as part of the catch-up contribution. It will grow to $6,000.

“If you’re over 50 and behind the eight ball, you can put up to $24,000 a year into your 401(k),” says Glenn Wiggle, a partner with Independent Solutions Wealth Management in Buffalo. “If you haven’t done the right thing early enough to save enough money, yes it can make a difference. You may only have five or ten years before you retire, but at least you are able to take the deduction and get more money pre-tax into an investment portfolio that can grow between now and the time you retire. It’s not going to be as effective as if you are 40, but it’s still worth doing.”

There are no changes in what people can contribute to their IRAs. They will remain at $5,500 and those 50 and older can continue to contribute an extra $1,000, an exemption that isn’t subject to an annual cost-of-living adjustment.

The Roth IRAs have increased income cutoffs. They will increase some $2,000 and fall between $116,000 and $131,000 for individuals and $183,000 to $193,000 for married couples.

The federal government is also introducing a new kid on the block when it comes to retirement investment vehicles that was unveiled in January during President Obama’s State of the Union address. It’s called myRA in a take-off on the IRA namesake.

The government has targeted low-income and middle-income Americans who don’t have access to a 401(k) plan at work and traditionally haven’t saved much towards their retirement.

Since it was announced in January, the investment vehicle has come under criticism by many financial advisors and other experts even though the account is guaranteed by the government never to lose money.

Here’s how it works:

Americans can make deposits via a payroll deduction but unlike a 401(k) an employer isn’t contributing to that amount. Employees can contribute whatever they want and deductions are made every payroll period and up to $5,500 a year.

Only those who earn less than $129,000 a year and couples who earn less than $191,000 are eligible.

The investment vehicle acts similar to a Roth IRA with contributions able to be withdrawn tax-free. When the account is five years old and the holder approaches 60, the earnings can be distributed without an added tax.

Where the criticism has been levied is that the myRA, even though there are no fees, is an investment in government treasuries. Financial advisors are worried that it’s bad for the investors and will push some people into those investments rather than an IRA or 401(k) that can generate more income than the 1.5 percent that would have been returned in 2012 for example.

“It’s a horrible idea,” Wiggle says. “You’re telling people basically go out in this government plan, and we will give you this guaranteed income off Treasury Bill rates. For someone who’s 30 or 40, you’re basically giving somebody bad advice. If I gave that advice to a client at that age, depending on what their risk tolerance was, I would be talking to the SEC. To me, although the limits are lower which is an advantage in that respect, I don’t think having treasury investments with that kind of rate of return is really going to help anybody. And the reality is it’s going to hurt them in the longer term.”

Wiggle says he doesn’t want the government to make it easier for people to make the wrong type of contribution for the wrong type of investment. Someone in their 50s who has a more aggressive tilt and can stomach some volatility.” a Treasury-linked investment is “a bad deal flat out,” he says.

“You’re targeting low-to-middle income Americans that are probably not that investment savvy,” Wiggle says. “You’re offering them something that’s not going to grow as a traditional market-based investment over time. You’re offering something that looks good and is real easy and it’s going to be guaranteed interest rates at nil basically.”

Wiggle says he would love instead for the government to increase the IRA limit to $10,000 for individuals to encourage people to put money away until retirement. He says he would like to increase the 401(k) limits to $25,000 to $30,000 as well.

“Why have it at $15,000 or $17,000 or $18,000,” Wiggle says. “The government is looking at it from how much are we losing. From a taxpayer perspective, this is our money to begin with. It would nice to let us keep more of it by putting more into a portfolio that we can draw upon when we retire. That makes the most sense. Congress doesn’t want to give up any more revenue than they have to because they look at it as a cost to the government. From an investor standpoint, it’s more money in our pocket. We are going to pay taxes eventually when we draw from it, but it gives us the opportunity to get that money working for us immediately.”

The rules of the myRA allow people to use the accounts for up to 30 years or until their balance grows to $15,000. At that point, the balance transfers to a private sector retirement account.

It appears the one good part of the myRA account is how it’s like our grandparents or parents giving us a piggy back when we’re young to encourage us to start saving. Hopefully, many people will use the experience of saving to move into an IRA or 401(k).

“The baby boomers are often times behind the curve of where they should be asset wise,” Wiggle says. “I have seen the statistics where the average 45-year-old has a $45,000 401(k) balance. I’m not sure how much income they’re looking to replace but that’s off to a pretty slow start I would say. I think a lot of folks are starting late, and it would be nice to allow them to deduct a much higher amount pre-tax and give them the flexibility so the money works for them. I don’t see a negative to it.”

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