IRAs Still Make Sense, Even With Tax Reform

QUESTION: I thought IRAs were obsolete for people covered by retirement plans at work. But I have heard several people I know say they’re still contributing to their plans. I don’t get it.--F. F.

ANSWER: If you’re thinking about immediate tax breaks, IRAs are indeed a plum of the past for many employees. But if you can think of these individual retirement plans as a vehicle for accumulating tax-deferred interest income, they are very much alive.

(Taxpayers who are covered by a company pension plan and whose adjusted gross income is $50,000 or more for couples--$35,000 or more for single taxpayers--cannot deduct IRA contributions from their taxable income. Taxpayers earning less than those amounts can take full or partial deductions.)

Even though many employees can no longer deduct their IRA contributions, they can still defer paying federal income taxes on the interest that builds up on their contributions until they withdraw the money for their retirement years. That is a real advantage over investment options whose earnings are immediately taxable because the interest builds up much quicker when you don’t have to withdraw some of it to pay taxes.

And don’t be fooled by the lower interest rates you earn on IRA investments compared to other, immediately taxable investments. The 8% rate you’re likely to be quoted by an IRA plan is equal to a taxable yield of 11.1% if you’re in the 28% tax bracket and 11.94% if your income is taxed at a 33% rate.

Q: I was recently “laid off” from my job, supposedly as part of a cost-cutting program. In fact, I think I was one of the ones to be let go because I am a woman in my upper 40s. I am thinking of suing to get my job back and for back pay for the time I’m out of work. But I want to find out first whether I would have to have taxes taken out of any settlement I get. If I do, I’m not sure it’s worth the trouble--especially if I don’t end up getting my job back.--S. H.

A: Some job-dispute settlements are taxed and others aren’t. It all depends on how the settlement is structured and what it is called.

Usually, the IRS views such settlements as taxable because they are largely back pay--wages that would have been taxable had the employee received them while still on the job.

So, to avoid being taxed on any settlement you might get, it is up to you and your lawyer to structure it so that the money is mostly something other than back pay. Often, lawyers say, the way this is done is to sue for damages because of discrimination rather than suing for back pay. Such damages usually aren’t taxable.

Q: My employer has gone on a health kick and is sending out memos urging everyone in the company to enroll in a company-sponsored exercise program. I just don’t go in for work-related social things, and I’m offended by this request. Furthermore, I don’t know what business it is of theirs whether I’m in shape or not. Do you know if other companies are doing this and what the reasoning is if they are?--H. B.

A: Your employer certainly isn’t alone. The Washington Business Group on Health, which recently did a study on employer fitness programs, says 53% of U.S. corporations employing 750 or more now sponsor fitness programs. Smaller companies are less likely to offer such programs, although the group found that fully 20% of companies employing about 50 employees offer exercise programs.

The reason, as you probably have already suspected, isn’t benevolence. It’s money. Corporations are discovering that healthier employees are more productive and file fewer medical claims. Disability claims also have been found to drop significantly at companies whose employees enroll in corporate fitness programs.

Prudential Insurance Co., for example, reports that by offering employees exercise programs and free lab tests and medical examinations, it is saving $1.91 in medical insurance and disability costs for every dollar it spends. The company also says that 12 months after its fitness program began, its medical expenses had dropped 45.7%.