Wish You Could Save More Tax-Deferred? Tell Congress

Last weekend, at the third annual Los Angeles Times’ Investment Strategies Conference, several of you came up to me with questions I couldn’t answer. Among them:

* How can I tell when the stock market is going down and staying down?

* How can I tell when the market is going up, and staying up?

* Why can’t I put more money into my company-sponsored 401(k) retirement plan or my IRAs?

As for the first two questions, I haven’t a clue. (If I did, do you think I’d be working at a newspaper for a living?)

As for the third, my response is simple: Go ask Congress. In fact, now would be a great time to do just that.

Presently, there are three sweeping pension reform proposals wending their way through Congress--two in the Senate and one in the House.

In addition, there are a number of smaller bills that address certain aspects of the nation’s 401(k), 403(b), 457 and IRA systems.

“There’s an urgent need to expand and improve our retirement system,” says Rep. Rob Portman (R-Ohio), who, along with Rep. Benjamin L. Cardin (D-Md.), is co-sponsoring the Comprehensive Retirement Security and Pension Reform Act of 1999. “The bottom line is government should be encouraging, not discouraging, retirement savings.”

Who could argue with that?

But whereas death and taxes are guaranteed, pension reform is not. Improving the features of a tax-deferred retirement account tends to make such accounts more attractive. Investors, then, would be inclined to stash more money into these accounts.

In the long term, that would be great for the government. The more financially secure households there are, the less pressure there will be going forward on our financial safety nets. But short term, it means Americans will be deferring more money from taxes, and that means less tax revenue for the Feds.

Still, a boy can dream, can’t he?

The proposals cover a lot of ground, including:

Contribution Limits: Today, the government allows 401(k) and 403(b) plan participants to contribute up to $10,000 each year to their plans with pretax money.

The Portman-Cardin House bill would raise that to $15,000. A bill in the Senate sponsored by Sens. William V. Roth Jr. (R-Del.) and Max Baucus (D-Mont.) would do the same. Another bill in the Senate, being pushed by Sens. Bob Graham (D-Fla.) and Charles E. Grassley (R-Iowa), would put the maximum at $12,000.

The three bills would also raise annual 457 contribution limits--now $8,000 a year--closer to the 401(k) limits.

“It’s not about increasing limits, but really restoring them to where they were,” Portman says. He notes, for instance, that 401(k) and 403(b) participants could contribute significantly more before the tax reform legislation of 1986.

Roth’s proposal (yes, he’s the Roth in Roth IRA), also calls for raising IRA contributions from $2,000 a year to $5,000, and then allowing it to rise with inflation. He also wants to let everyone sock that much away in a Roth IRA--not just individuals who earn less than $110,000 and couples with joint incomes below $160,000.

Catch-Up Provisions: Here’s something that a lot of baby boomers will appreciate:

Several plans, including Roth’s and Portman’s, call for giving older workers, perhaps age 50 or older, the chance to make larger “catch-up” contributions to their tax-deferred retirement plans if they’ve fallen behind for whatever reason.

Perhaps you couldn’t afford to put more money in at an earlier age. Some women who left the work force temporarily to start families may not have been allowed to contribute to a retirement plan during those years. Such proposals would remedy this.

The details of the proposals are not settled, however. It’s also not clear how such as a change would affect discrimination tests that companies offering 401(k)s must conduct to ensure that highly paid workers aren’t disproportionately benefiting from these plans.

Portability: Several of the bills call for providing workers with greater flexibility when it comes to changing jobs.

For instance, it’s not uncommon these days for a worker to change jobs eight times or more throughout a career. When a worker leaves a company, most often he or she can roll an existing 401(k) account over into the next employer’s 401(k). Unfortunately, that’s not possible if the worker would like to move retirement money from one type of employer retirement account into another.

For instance, say a teacher with a 403(b) plan decides to take a job with a private-sector firm that offers a 401(k) plan. Since the two plans are different in structure, he or she can’t roll that 403(b) money into a 401(k).

To be sure, in most cases 401(k) and 403(b) plan participants can roll their accounts over into an IRA upon leaving a job. But municipal and state workers with 457 plans cannot do likewise.

Several pension reform bills seek to remedy this.

What’s the likelihood of any of them becoming law? There’s cause for some optimism here.

“I don’t know of anyone who’s against it,” says Portman.

Why? Because it’s considered “revenue neutral.” In other words, it’s something that won’t cost the federal government any tax revenue. That’s not to say increased portability is considered a slam-dunk.

Debra Levine, assistant vice president for retirement plans for Pioneer Investment Management in Boston, notes that although “the broad idea is fairly simple, behind the scenes, things, I think, will take a bit of work.”

Among the concerns that need to be addressed: How do you figure out the penalty rules? For instance, currently, if you withdraw money from a 401(k) before turning 59 1/2, you’ll be hit with a 10% penalty. But 457 plans have no such penalty. So if 401(k) money is rolled over into a 457 and then withdrawn before the participant turns 59 1/2, would he or she get slapped with a full penalty, a partial penalty, or no penalty at all?

Faster Vesting: To their credit, many companies have recently shortened their vesting period--the time you’re required to be with the company before any matching contributions made by the company to your plan become legally yours.

In fact, according to a survey by benefits consulting firm Buck Consultants, 29% of the nation’s 401(k) providers who make matching contributions immediately vest their plan participants. However, at least 50% of all companies that offer a 401(k) require five years or more of service before an employee can be fully vested.

Several bills seek to limit the period to no more than three years.

*

The timing for these proposals couldn’t be much better. As a nation, we’re more aware of what tax-deferred saving is--and how much of a difference it can make in our savings--than ever before.

“We’ve reached critical mass” on awareness of these issues, says David Wray, president of the Profit Sharing/401(k) Council of America, based in Chicago.

But Wray is a realist. “Things in Washington are always so unpredictable,” he says. There’s a good chance parts of these proposals could get attached to contentious tax-reform legislation. Given all the unknowns, it’s impossible to predict which parts, if any, of these proposals might actually get through Congress and be signed by the president.

Which is why Wray says, “Write your congressmen and senators.”

Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.