3 Ways Obama’s Saving Initiatives Will Affect Your Retirement

Workers will be able to contribute compensation for unused sick and vacation time to their 401(k) plan

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President Obama announced several new federal initiatives to promote retirement savings today. “I’ve heard from so many who’ve had to put off retirement, or come out of retirement, to make ends meet,” Obama said during his weekly radio address today. “And having too little in savings not only leaves people financially ill-prepared for retirement, but also for whatever challenges life brings.” Obama cited the approximately $2 trillion in retirement savings Americans have lost over the past two years.

The changes give employers an easier way to automatically enroll workers in retirement plans and the option to contribute compensation for unused vacation and sick days to 401(k)'s, but don’t require companies to do so. Taxpayers will also get a new way to save their tax refunds. “Working Americans should be able to retire with dignity and security, but nearly half of the nation's workforce has little or nothing beyond Social Security benefits to get by on in old age,” said Treasury Secretary Tim Geithner in a statement. “The measures we are announcing today will give more choices to families who want to save.” Here is how the new retirement savings options could affect your retirement plans.

Automatic enrollment in retirement accounts. A new rule makes it easier for small businesses to automatically enroll workers in 401(k) or other retirement savings plans. “We know that automatic enrollment has made a big difference in participation rates by making it simpler for workers to save—and that’s why we’re going to expand it to more people,” Obama says. The IRS recently issued pre-approved automatic enrollment language that employers can use to amend their retirement plans. Plan administrators may also automatically increase the default amount their workers save each year. Employees must be given at least 30 days notice specifying the percentage of their salary that will be withheld from each paycheck and how that money will be invested. Workers will also be informed about how to opt out of the plan, save a different amount, or choose different investments at least once a year. Employers without 401(k) plans may automatically enroll workers in a SIMPLE-IRA and employees may opt out.

Saving tax refunds. Workers can already have all or a portion of their tax refunds directly deposited into IRA accounts. Beginning in 2010 tax refunds can also be used to purchase Series I Savings Bonds, simply by checking a box on your tax return. Savings bonds will be mailed to taxpayers who choose this option in denominations of $50, $100, $200, $500, and $1,000. These bonds generally cannot be redeemed for cash during the first 12 months that you own them. If you cash the bond in within five years, three months' interest is forfeited. After five years there is no penalty for spending your savings bond and these bonds will continue to accrue interest for up to 30 years. Series I Savings bonds pay a fixed rate of return credited on the first day of each month and an inflation rate semiannually based on changes in the Consumer Price Index. Savings bond interest is exempt from state and local income tax, but is subject to federal income tax, which can be deferred until redemption or final maturity. A feature to add co-owners to the bond such as children or grandchildren will become available in 2011.

Save your sick and vacation days. Workers who receive cash payments for unused sick and vacation time may now be able to contribute that amount to their 401(k) plan. But if your employer doesn’t currently compensate you for unused leave they will not be required to do so.