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 .
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.
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.