Money

Your 411 on the 401(k)

Why you might be in for an overhaul

With the decline of pensions and the uncertain future of Social Security, the importance of do-it-yourself retirement accounts—like IRAs and 401(k)s—has never been greater.

In 2011, Americans held about $4.86 trillion in their IRAs, and another $3.96 trillion invested in “defined contributions plans,” which include 401(k)s. With those high numbers, retirement plans have drawn the attention of lawmakers who have hopes of making more money from them through tax revenue. So, over the next few months, there might be some changes afoot to some of the rules governing your retirement plan.

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In President Obama’s proposed budget for the fiscal year that begins October 1, he is proposing six changes to the way 401(k)s and IRAs work, MarketWatch reports.

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Among the proposed changes are the following:

Rules for Inheriting IRAs

Currently, if you inherit an IRA from someone who is not your spouse, you can make withdrawals from it throughout your lifetime. However, the proposal states that, going forward, people will have to empty the IRAs within five years of receiving them. Since you pay taxes on withdrawals from an IRA, that means more tax revenue for the government as people make larger withdrawals at once. The change would, however, exclude some beneficiaries, including people with disabilities.

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Instituting Savings Caps

If this White House provision goes into effect, people whose total tax-deferred accounts (this includes traditional IRAs and 401(k)s) can produce a joint and 100% survivor annuity of $205,000 a year will not be able to contribute any additional funds to their accounts. This would require having about $3.4 million in your retirement accounts today, which, unfortunately, is not a figure many Americans have to worry about hitting. However, we’re currently living in a very low-interest environment, and if interest rates go up, that cap could get much closer.

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Mandatory IRAs

The president also proposes that all companies that have been around for two years and have more than 10 employees should be required to automatically enroll its workers in IRA plans. The default contribution would be 3% of a paycheck, but the employee would be allowed to choose how much he or she would have deducted.

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