A 529 plan could help take your college savings from scary to sweet

Today’s trick-or-treaters are tomorrow’s college students. Are your savings on track?

Tom RowleyTime to read: 2 min

Things have a tendency to get a little bit scary around this time of year — and I’m not just talking about the little ghosts, goblins and ghouls knocking on your door Halloween night. I’m talking about what happens to your wallet.

According to the National Retail Federation’s annual spending survey, Americans spent approximately $9 billion in 2017 (up from $8.4 billion in 2016)1 on Halloween celebrations, including candy, decorations and those cute kids’ costumes.

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House passes retirement component of Tax Reform 2.0

The bill includes changes affecting minimum distribution requirements, multiple employer plans, Universal Savings Accounts, individual retirement accounts and 529 plans

Jon VoglerTime to read: 2 min

On Sept. 27, the House of Representatives approved retirement reform legislation (the Family Savings Act) as part of the “Tax Reform 2.0” package of bills.

The House also passed the American Innovation Act of 2018, which is the small business innovation portion of the Tax Reform 2.0 package. On Sept. 28, it also passed the Protecting Family and Small Business Tax Cuts Act of 2018, which is the part of the package that would make permanent various individual and small business tax provisions from the Tax Cuts and Jobs Act.

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ICI reports offer insights into the characteristics of IRA investors

The studies reveal differences between traditional and Roth IRA investors’ ages, asset allocations and contribution activity

Jon VoglerTime to read: 2 min

The Investment Company Institute (ICI) recently issued two reports on individual retirement accounts (IRAs) that describe the habits and behaviors of IRA investors. Titled “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007 – 2016” and “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007 – 2016,” thereports analyzed data from The IRA Investor Database™, which tracks more than 17 million IRA investors. This information provides detail on the typical age of investors in both traditional and Roth accounts, how they begin saving in IRAs and the differences in asset allocations between owners of the two.

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Reconsidering caregiver retirement benefits

Policy experts recommend adding Social Security wage credits for caregivers

Jon VoglerTime to read: 3 min

While traditional family roles have been evolving, it is still true that women tend to work fewer years and earn less than men during their careers. One major reason for this discrepancy — women usually serve as the main family caregivers. A new study suggests recent demographic changes are further harming women’s ability to fund their retirements, leading policy experts to recommend ways to counter this trend.

New study adds to concern for women in retirement

The realization that women generally don’t work as many years as men is not new. In fact, Social Security already has built-in adjustments to make payments more equitable (spousal and widow benefits). However, these benefits only apply to married women. A new brief from the Center for Retirement Research (CRR) at Boston College shows fewer women are married today — either they never wed, or they divorced before the 10 years necessary to qualify for a spousal benefit. And because they’re still losing time from the workforce for childrearing and/or caring for family members, they forgo wages that could have boosted their own worker benefit.

Policy experts recommend wage credits

Given this concern, according to the CRR report, some policy experts are suggesting that Social Security add wage credits that would increase the earnings record of caregivers (thus raising retirement benefits). Such credits, which sometimes cover caring for an elderly relative as well as a child, are already common in other developed countries.

Different countries use caregiver credits for a variety of objectives. While the primary goal is to improve retirement benefit adequacy for women, countries also use credits to promote higher fertility rates, to encourage new mothers to return to the labor force (by offering a bonus to working caregivers), or simply to reward the provision of unpaid care. One commonality among these programs is that they link credits to parenthood, not marital status. The CRR study looked at programs in the UK, Sweden and Germany. In the UK and Germany, caregiver credits are offered for taking care of elderly or ill relatives as well as children, while Sweden confines these credits to caregivers of children (although in Sweden, parents must also have work credits).

The extensive experience with childcare credits in other developed countries suggests that these programs can be successfully administered to meet specific objectives. On the other hand, the mix of designs suggests that any consideration of caregiver credits should begin by determining the primary policy objective.

Two main remedies proposed

According to the CRR report, US policy experts have proposed two main types of childcare relief through Social Security:

  • The first would increase the number of work years that are excluded from benefit calculations. The current Social Security benefit formula is based on a worker’s highest 35 years of earnings. Under this proposal, parental caregivers (for children under six years of age) could drop up to five years from the benefit calculation, reducing it from 35 to 30. By eliminating up to five years with zero earnings, the caregiver’s Social Security benefit would be increased.
  • The second would provide earnings credits to parental caregivers with a child under age six for up to five years. The credit for each year of care would equal one-half of the Social Security Administration’s average wage index (about $24,682 in 2016). So instead of eliminating up to five years with zero earnings as described above, each eligible caregiving year would essentially be replaced by a year with earnings of one-half the current average wage index.

Effectiveness and cost

The first proposal, dropping up to five years of zero earnings from benefit calculations, would cost relatively little, while providing earnings credits would have a more significant cost. The report observes that childcare credits have been found in other studies to have modest effects, but would be most helpful to women at the bottom of the lifetime earnings distribution. In another study, childcare credits were found to be “more effective than either current spousal benefits or dropout years at reducing poverty for low-income groups and minorities.”

The report concludes that the cost of providing such childcare credits could be covered by reducing benefits somewhat for higher earners.

As always, we will continue to monitor this situation and will keep you posted.

Sources:

Center for Retirement Research at Boston College, “Modernizing Social Security: Caregiver Credits,” Alicia H. Munnell and Andrew D. Eschtruth, Aug. 2018 (Number 18-15)

BenefitsPRO, “Social Security and caregiver credits: An idea whose time has come?”, Marlene Satter, Aug. 17, 2018

Important information

Blog header image: Mr. Samarn Plubkilang/Shutterstock.com

Jon Vogler

Senior Analyst Retirement Research, Invesco Consulting

Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.

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New tax reform bill includes retirement provisions

The Family Savings Act seeks to simplify existing rules for retirement savings

Jon VoglerTime to read: 3 min

On Sept. 10, House Ways and Means Committee Chairman Kevin Brady, R-TX, unveiled three bills that seek to build on the 2017 tax reform law. One bill would make certain individual and small business tax cuts permanent. Another includes a tax provision related to business innovation. Finally, the package includes the “Family Savings Act of 2018,” which would simplify existing rules to make it easier to save for retirement. Given this bill’s focus on retirement, we are providing additional detail below.

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IRS opens the door for a student loan benefit tied to 401(k)s

The ruling provides guidance for employers looking for ways to offer a student loan repayment benefit as part of their retirement plan

Jon VoglerTime to read: 2 min

On Aug. 17, 2018, the Internal Revenue Service (IRS) announced a decision that allows an employer to offer a student loan repayment benefit as an element of its retirement plan — a change that could help clear the way for other employers to offer similar benefits.

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