President Obama Indicates New Retirement Plan Option for Workers

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President Obama Indicates New Retirement Plan Option for Workers

Jan 29, 2014

by Gregory S. Dowell

In his state of the Union speech last night, President Obama declared that he would use his executive powers to establish a new retirement savings option for workers. Calling this the “MyRA” (a bit of a tongue-twisting play that combines “My” and “IRA”), President Obama described this as a 401k-type savings vehicle that would be available for all workers. While his speech was lacking on specifics, he indicated that the wages deferred by workers would be invested on a tax-deferred basis in U.S. government obligations. Early withdrawals from the MyRA will be subject to penalties, similar to the way that early withdrawals are penalized from an IRA. The President believes that millions of Americans will choose to participate in the MyRA plans.

The amount of new ground that the President is breaking is debatable. It is important to note that the option to save for retirement already exists for virtually all working taxpayers. Taxpayers who are not offered a retirement plan by their employers (like a 401k or a Simple plan) presently have the ability to establish and invest their funds in an IRA or a Roth IRA. While the mechanism for workers to save for retirement already exists under current tax law and is nothing new, studies apparently show that workers are more likely to save if they can do so through a payroll deduction. According to the Bureau of Labor Statistics, 68% of all workers are presently offered a retirement plan at their place of work; of these, 54% presently have chosen to participate in the plans.

Apparently, the President and his advisers believe that the workers who presently are 1) not offered a retirement plan option by their employers and 2) who have chosen not to participate in the IRA and Roth IRA options presently available, will flock to the MyRA plans because of the payroll deduction aspect. Undoubtedly, there will be some success stories: Some workers not presently offered an employer’s retirement plan will take this option and will participate successfully. However, one has to wonder if a significant number of employees, who are not presently motivated to seek their own retirement plan option will now do so, just because the payroll deduction is available.

In addition, one has to wonder if the President’s plan is Pollyannic and simply misses the mark. For instance, many of those employers who do not offer retirement plans are small business owners who are employing lower-wage earners. Some of those lower-wage earning employees will not be able to participate in the MyRA because they can not afford to set aside any of their paycheck – all of their take-home pay is necessary to cover their basic living expenses. Many more of those employees, perhaps those who are just above the marginal level of take-home pay, will gamely try to participate in the MyRA, only to find that they must withdraw the funds they have set aside via payroll deductions to cover some emergency expense, which will subject those employees to the early withdrawal penalty. In other cases, the amounts that these lower-paid employees can set aside will be very small, and it is likely that the fees incurred on the accounts will gobble up a disproportionate amount of their savings. In these unfortunate instances, the MyRA will hurt exactly those employees that the President set out to assist.

While this may be an easier adoption for larger employers, a mandated retirement option will pose a challenge, and a cost, to many small business employers. That cost will largely come through the additional administrative burden placed on small businesses to be in compliance. Some of those small businesses, certainly, will avoid participation and suffer penalties. Not surprisingly, those in the investment community will largely get behind this plan. Some plan custodians, like Vanguard, have tentatively indicated that they support any attempt to help Americans save. Of course, those plan custodians and others in the investment field will recognize a benefit from the additional dollars that are driven to them by the President’s plan.

Few would argue that making an attempt to level the playing field and to help workers save for retirement is a bad thing, and the President should at least be applauded for taking the initiative (and he was, repeatedly, during his speech). Let’s hope the plan defies a few odds and works. It is still early – again, specifics were lacking in the President’s speech. It appears, however, that this will be a developing story that will affect all businesses.

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by Gregory S. Dowell Updated May 16, 2023 Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds. To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. 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As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year. For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket. For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers. Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%. Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.