Lawmakers prod workers to save more for retirement

WASHINGTON -- Rich, poor and in between, the nation's workers are being prodded by the government to save more money for retirement.

They're being given incentives, too, encouraging them to do more on their own rather than rely on company pension plans.

One legal change, included in a pension-rules overhaul that President Bush will sign into law Thursday, will let savers put more money in their personal and workplace retirement accounts during the next decade.

Another will keep alive a credit worth up to $2,000 for lower-income savers working toward retirement.

"The days of the good old mother company taking care of you with a pension as a retiree are gone," says Bill Fleming, managing director in the private company service group at PricewaterhouseCoopers.

Many of the savings incentives, included in a bill for shoring up traditional pensions, were temporary benefits enacted in 2001 and scheduled to expire in 2011. By making the enticements permanent, lawmakers hope to cut taxes for savers by roughly $46 billion between 2007 and 2016.

One change gradually increases the amount individuals can contribute to their Individual Retirement Arrangements, or IRAs, each year. Without action, the contribution limit would have fallen to $2,000 in 2011.

Savers currently can deposit $4,000 annually into IRA accounts. The contribution limit will rise to $5,000 in 2008 and keep increasing in future years to keep pace with inflation. Contribution limits for workplace 401(k) accounts also will rise.

Congress also preserved special rules that let people age 50 and older make extra contributions to their retirement plans.

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, said two other changes offer workers "the biggest bang for the buck."

One encourages employers to automatically enroll their workers in 401(k) savings accounts. That allows employees to set aside a portion of their wages, before paying taxes, and save the money for retirement. Savings can build tax-free, but taxes are due upon withdrawal.

Employers could start automatically enrolling their workers in 401(k)s in 2008. Employees who want to withdraw from the savings plan could do so within 90 days.

A second change makes permanent a type of 401(k) account that works like a Roth IRA, a savings option permitted for the first time this year.

The accounts allow employees to set aside income in a 401(k) after paying taxes on it. The money can grow and be withdrawn later tax-free. More employers may offer the accounts now that they don't have to worry about the temporary authorization running out.

"Those are places where people can get their money into savings before it has a chance to go to the local retail merchant," Stretch said.

Parents putting money aside in state college savings programs known as Section 529 plans can be assured those programs will continue. The bill made permanent the federal income tax benefits that give contributors a tax break on income from money saved and invested for college expenses. Those parents can expect to save $4 billion in taxes over the coming decade.

Lower-income individuals and families can continue to count on the saver's credit, which offers a break worth up to $2,000 for retirement savings. It's now a permanent benefit for qualified savers who contribute to a workplace or personal retirement account.

A host of rule changes designed to make it easier for people to move their retirement funds among accounts were preserved. That includes one allowing certain retirement accounts to be directly rolled into a Roth IRA.

The changes also:

-- Allow taxpayers to deposit part of their tax refunds into a retirement account.

-- Annually increase the income limits for taxpayers who can make contributions to Roth IRAs and who can make tax-deductible contributions to traditional IRAs to keep pace with inflation.

-- Annually increase the income eligibility for the saver's credit to keep pace with inflation.

-- Allow individuals age 70 1/2 and older to make tax-free charitable contributions up to $100,000 from an IRA. The contributions must be made before the end of 2007.