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The Hartford Emphasizes 401(k) Tax Advantages

The Hartford is waging an educational campaign emphasizing tax-saving tips for retirement plan participants.

If the campaign works as effectively as The Hartford's earlier 401(k) educational savings efforts, the asset management company estimates it could boost contribution rates.

"We want to get participants thinking," said E. Thomas Foster, Jr., Esq., vice president and national spokesperson for The Hartford's retirement plans, which totaled $55 billion in assets under management at the end of 2010.

The tack is being taken because many Americans are worried about rising taxes, as the nation faces $14 trillion in debt and an annual deficit of $1.5 trillion, following the 2008 credit crisis. They also do not fully understanding the tax benefits of various retirement savings options, which could help them if taxes rise in 2012 and beyond, "We want to educate employees about the opportunities to reduce their tax bills, defer taxes on their investment earnings or generate tax-free income," he said. "We feel showing them how tax advantages can boost their savings is particularly timely since people are increasingly less comfortable that they will have enough money in retirement."

Many participants, for instance, are surprised when they are shown how increasing their 401(k) contributions can have a much lower impact on their take-home pay than they would have expected, by lowering taxes, Foster said.

"When they see it doesn't necessarily impact their paycheck the way they would have expected, it's a great motivator to save more," Foster said.

For those participants who expect that taxes will be higher by the time they retire, The Hartford illustrates how a smart option for them might be to invest after-tax money in a Roth 401(k) or Roth IRA since withdrawals are tax-free.

The Hartford is providing these educational materials to the 33,000 plan sponsors with 1.5 million plan participants that it serves. But, because The Hartford sells and administers its retirement plans through third-party administrators (TPAs) among financial advisers and broker-dealers, it is also equipping them with the materials.

These TPAs are served by The Hartford's retirement plan sales and client service staff of 181. This includes 85 regional sales directors, and 64 regional planning consultants who work with new sponsors and 32 retention specialists who work with existing sponsors on enrollment and education.

The Hartford's tax-savings tips emphasize the following opportunities:

* The Savers Credit, provided under the Economic Growth and Tax Relief Reconciliation Act of 2001.

"What is amazing to me is that this has been around since 2001, but the vast majority of people in plans are not aware of it," Foster said.

The credit provides up to $1,000 for individuals and $2,000 for couples who meet specific income eligibility requirements and are saving for retirement. To qualify for the Savers Credit for the current tax year, taxpayers must have adjusted gross income that does not exceed $56,000 if married and filing jointly, $42,372 if head of a household or $28,250 if single or married and filing separately.

* Roth 401(k). Contributions are made after taxes but earnings accumulate tax-deferred and withdrawals are tax-free at retirement.

* Traditional 401(k). Contributions are made before taxes are paid, lowering a participant's overall taxable income. Earnings accumulate tax-deferred, but taxes are payable for both principal and earnings upon withdrawal.

Foster noted that while IRAs have required minimum distributions at age 70-1/2, neither type of 401(k) does, unless a person is already retired or owns 5% or more of a company.

"Many people are planning to continue to work into their Seventies, and if they continue to work, one of the things that could impact their accumulation is a requirement to draw down the money," Foster said. "These are nuances that people might not know about unless we educate them," he said.

The Hartford also notes that many participants are also not aware of the 401(k) catch-up provisions permitted to those age 50 or older. While the maximum contribution is $16,500 in any given year, those age 50 or older can contribute an additional $5,500 a year.

* Matching Contributions. Many employers offer matching contributions. Some provide a 50% match on an employee's contributions up to 6% of their income.

* Roth IRAs. Investors can contribute up to $5,000 in 2011 or $6,000 if age 50 or older and their income does not exceed $107,000. Like a Roth 401(k), contributions are made with after-tax money, earnings accumulate tax-deferred and withdrawals are tax-free at retirement.

Taxes are a big concern for many people, particularly in lower income brackets, The Hartford found in a survey of 764 adults aged 45 and older in April. But people who earn less are less likely to contribute to their 401(k) or seek the help of a financial adviser, the survey showed.

Thirty-seven percent of those earning less than $50,000 cited rising taxes as their No. 1 investment concern, compared to 28% of those in the $50,000-$100,000 income bracket and 31% of those earning more than $100,000.

"Rising taxes can have a bigger impact on Americans with lower incomes, so they are understandably more concerned about that possibility," Foster said.

The survey also found that only 24% of those in the under $50,000 group contribute to their 401(k) plan, compared to 45% of those in the $50,000 to $100,000 range and 53% of those in the over $100,000 income bracket. Only 20% of those in the under $50,000 group use a financial adviser, compared to 39% of those in the $50,000-$100,000 range and 41% of those who take in more than $100,000.

The Hartford's current campaign comes on the heels of its "Two for Tomorrow" campaign that kicked off in January, advising Americans to take the 2% reduction in Social Security payroll taxes and use the money to boost their retirement savings.

The government reduced Social Security payroll taxes by two percentage points in 2011, from 6.2% to 4.2%. In 2012, that will apply on wages up to $106,500.

"The reduction in Social Security taxes is a perfect opportunity for retirement plan participants to redirect these additional funds into their retirement accounts," Foster said. "It's a painless way to enhance retirement savings and help build a more secure financial future."