Employers already have the ability to let workers contribute the value of their unused vacation time to their 401(k) plans but it is pretty rare for en employer to do so. A recent proposal by President Obama will make it easier for employers to convert unused vacation and sick leave pay into a retirement account such as a 401(k) plan. The purpose of the plan is to try to encourage Americans to save more – while the American saving rate has increased from the dismal 0% rate in the last year or so – the low amount of savings that middle-aged Americans have is going to be a big problem when they try to retire.
What kind of retirement accounts will it apply for?
This program will apply to any qualified retirement plan. 401(k) plans, Roth IRA, tradition Roth etc. It hasn’t been announced if you will have the option of splitting up your unused vacation time into different accounts or have to designate one account to be the receiver of any contributions resulting from unused sick days or vacation time.
Will these contributions be on top of existing contribution limits?
No, the contribution limits won’t be changing for any retirement accounts. If you have already reached the contribution limit for your Roth IRA for example then you won’t be able to use that account for this purpose.
What if my current vacation/sick leave is “use it or lose it”? Can I still contribute?
Probably not. These changes are voluntary for employers and employees and there are no actual rules changes. If you lose your unused holiday at the end of the year then it would be up to the employer to “volunteer” to allow these unused days to be contributed to a retirement account. I wouldn’t hold your breath waiting for this to happen.
Will these changes encourage workers to save more?
I doubt it – workers who can already “bank” their vacation days and unused sick leave pay will just continue to do so. Workers who don’t have the ability to carry over these days are very unlikely to have an employer who suddenly decides to allow employees to keep their vacation days.
Where there any other changes announced?
Ability to buy US government savings bonds with your IRS tax refund.
Starting in 2010 you will be able to select “buy savings bonds” selection when filing your taxes. Your tax refund will be used to buy US government bonds which will be mailed to you. I’m not sure how useful this is since these bonds don’t pay very much interest and are probably a more appropriate investment in a tax-sheltered account such as the Roth IRA.
Auto-enrollment for retirement plans
Another feature of the latest proposals is to make it easier for small and medium sized employers to automatically enroll employers into their company retirement plans. Currently there is a fair bit of bureaucratic paperwork to set this up and this process will be streamlined.
Want to learn more about RESPs? Buy The Book:
The RESP Book: The Simple Guide to Registered Education Savings Plans
Everything you need to know about RESPs.