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 “previous hitmyRAnext hit”) 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 - Comerica Bank.  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  This is overly simplistic to the unwary and is not meant to imply that the entire account balance can be withdrawn without a penalty, however.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). 


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