Monday, December 15, 2014
Bloomberg BNA
Treasury Releases Regulations Governing Retirement Savings Bonds
On January 29, 2014, President Obama issued a memorandum directing the
Secretary of the Treasury to develop by year-end a new retirement savings
security (originally called a gmyRAh focused on
reaching new and small-dollar savers. On December 12, 2014, Treasury
issued final regulations in response to the memorandum. The new retirement
savings program established under the regulations allows individuals to
establish Roth IRAs with Treasury's designated custodian. Contributions
earn interest at the same annual percentage rate as securities issued to the G
Fund in the Thrift Savings Plan for federal employees. These accounts
have no start-up costs and no fees.
Eligible individuals may participate in the program until their account
balance reaches $15,000 or until they have participated in the program for 30
years, whichever occurs first. Although the program was initially intended
to allow for any amount of contributions, the final regulations provide that the
Commissioner of the Fiscal Service is authorized to establish minimum amounts
for initial and additional contributions to a retirement savings bond.
The Preamble to the final regulations provide that participants have the
flexibility to withdraw their contributions at any time without a penalty.
This is overly simplistic to the unwary and is not meant to imply that the
entire account balance can be withdrawn without a penalty, however. The
definition of a Roth IRA under 26 U.S.C. 408A is incorporated into the
final regulations by reference. This means that participants who withdraw
taxable amounts (e.g., earnings) prior to age 59 1/2 could be hit with
the 10% penalty tax. In addition, earnings may still be taxed if the
account has not been in existence for at least five years.
Some "pros" of the new program are that: (1) unlike other defined
contribution plans, investments are guaranteed to increase in value; (2) there
are no fees - a major complaint by participants in other defined
contribution plans; and (3) balances are portable - that is, they can be
transferred to commercial financial service providers at any time.
Some "cons" are that: (1) the investment rate is minimal; (2) the investment
alternatives are nonexistent (no stocks or mutual funds); and (3) the overall
contribution limit is extremely small (as way of comparison, the 2015 401(k)
contribution limit is $18,000).