New Details of Obama’s Automatic IRA Proposal

Three percent of pay would be withheld from employee paychecks and direct deposited into a Roth IRA

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The Treasury Department released new details about President Obama’s Automatic IRA proposal yesterday. Employers that don’t offer a retirement plan and have more than 10 employees would be required to automatically enroll their workers in a Roth IRA if they have been in business for at least two years .

[See Should Saving for Retirement be Required?]

Three percent of pay would be withheld from employee paychecks and direct deposited into a Roth IRA, the default savings option. Roth IRA contributions are made with after-tax dollars. So, employees would have to pay regular income tax on the money set aside for retirement. Roth IRA withdrawals at age 59½ or later from an account held for at least five years are tax free. Traditional IRA contributions are made with pre-tax dollars, but income tax is due whenever the account holder withdraws their savings.

Workers may opt out of the automatic Roth IRA, chose a traditional IRA, or elect to save a different amount. The administration has not yet publicly announced what the default investment will be. “A low cost, standard type of default investment and a handful of standard, low cost investment alternatives would be prescribed by statute or regulation,” according to the Treasury Department.

[See 5 Proposals in Obama’s Budget for Retirement Savers.]

Employers would not be required to make any contribution to the accounts. Automatic IRA deposits made by employees would qualify for the saver’s credit for those who earn $32,500 or less annually ($65,000 for couples). The White House is proposing amending the saver’s credit in 2011 to provide a 50 percent match on the first $500 of retirement savings for individuals and $1,000 for couples. Married couples who earn between $65,000 and $85,000 annually would also get a partial match and the tax credit would be refundable.