P.E.R.A. - the Philippine version of the I.R.A.

          BEING a pseudo-finance professional directly working within the U.S. milieu, I've always envied Americans for having a very systematic and well-enforced financial system.  They can utter all the derogatory remarks they can think of about their own Internal Revenue Service (IRS), but they're far better off than some people in the other side of the Pacific who are burdened by a self-serving monstrosity called the Bureau of Internal Revenue (BIR.)

          One of the things that I specifically want the Philippines to imitate is the institution of the Individual Retirement Account (or "IRA") which enables one to have tax-deferred retirement savings, and which one is forced not to withdraw for a specific amount of time (because otherwise, a penalty might be incurred.)  This is vastly different from membership in the SSS or GSIS where contributions are automatically deducted from the paycheck of the member.  Under the IRA, the contributor has more control and flexibility over the amount s/he wants to contribute.

          The concept of retirement accounts is already well-entrenched in the private sector - I myself have a retirement plan with a private financial company.  However, the need for a state-mandated system of saving for one's retirement is necessary because most working-class Filipinos do not have sufficient income to pay for the specified premiums of retirement plans by private financial firms, or in some cases, they are not allowed to contribute more than the premium.  In addition to this, unduly onerous conditions are imposed on planholders whenever they withdraw the savings before the plan maturity date.

          Well then, somebody in congress must be doing their job because last Friday, 22 August 2008, [so-called] President Gloria Macapagal-Arroyo signed into law Republic Act 9505, or what is now known as the Personal Equity and Retirement Account (PERA).  In fact, looking at the law's provisions the PERA seems to be designed as a better version of the IRA.  Let's look at the differences:

1.  Tax-exemptiion Status

          The IRA allows for tax-deferred contributions, which means that if the income is not yet taxed, one can place it in an IRA and only pay the taxes later on at the maturity date.  Any income earned by the IRA itself is also tax-deferred - thereby allowing the money to grow in the investment without being "nipped in the bud" by tax deductions.

          PERA, on the other hand, does not allow for deferment of the income tax payment but instead grants a tax credit equivalent to 5 percent of the total contributions in a given tax year.  This might not be as attractive as a tax-deferment, but when one thinks about it, it's more advantageous because it allows a contributor to pay less taxes at the present tax rate than paying more in the future - if congress enacts a law raising the income tax rate. 

          But here's the best part:  all earnings derived from the PERA are tax-exempt!  This means that if one chooses to invest P50,000 in PERA contributions in stocks and/or mutual funds - and these investments subsequently double in value - then the government can NOT touch that P50,000 capital gain.  (I wonder if the BIR realized this when they didn't make any objections to the signing of the law.  This rather brings us to the next section...)

2.  Primary Regulating Authority

          In the US, all different types of retirement accounts (IRAs, Roth IRAs, SRAs, Simple IRAs and even ESAs) are heavily regulated and very closely monitored by the IRS.  At the beginning, that was one of my reservations about a Philippine IRA.  If we were to completely copy the US version, then that means it would have to be regulated by our much-hated BIR.

          Thankfully, the PERA law clearly states that it should be handled by the Bangko Sentral ng Pilipinas (BSP).  I'm not that well-versed in administrative law, but I think the BSP is a co-equal division of the BIR under the Department of Finance - which means the latter can't interfere in the former when it is regulating the PERAs.

3.  Maturity Date

          An IRA typically matures when the contributor reaches 59 and 1/2 years of age.  This is however optional, and the contributor can choose to let the money remain in the IRA.  Upon reaching 70 and 1/2 years however, the funds in the IRA must be distributed (the IRA term for withdrawing funds).  The IRS has a specific computation that finds out the "Required Minimum Distribution" that the contributor has to take out for a given year.  If a contributor fails to make the RMD before the annual deadline, the penalty imposed by the IRS is a whopping 50% of the RMD amount.

          Now let's look at PERA.  Distributions are allowed when the contributor reaches 55 years of age - a good half-decade earlier than the mandatory retirement age.  And there is no RMD.  This means the contributor's options are more flexible.  S/he can distribute the funds at a much earlier age, or have it remain in the account for a longer time to further save for unforeseen needs.  (And I really need to reiterate how fortunate we are with the BIR's lack of foresight in not opposing the absence of the RMD in the PERA law.)

= = = = = = = = = =

          For those who, like myself, are familiar with IRAs, one can easily observe that the PERA seems to be more analogous to a Roth IRA (rather than a Traditional IRA).  No distinction is made as regards pre-tax and post-taxed income (which, in my interpretation, consequently nullifies the 5% tax credit for those contributing post-taxed income - but I can be wrong).  Similar to a Roth IRA , there is a "seasoning period" of 5 years before a distribution can occur.  This means that even if a contributor has reached 55 years of age, s/he still can not distribute the funds if the life of the PERA is less than 5 years.

          Other features of the PERA are similar enough to the IRA that there's no need to discuss them.  What's worth mentioning is the fact that the PERA is primarily designed for Overseas Filipino Workers (OFWs) who usually don't have the financial knowhow to let grow (or even just preserve) their considerable income.  The annual contribution limit for OFWs is P200,000, while non-OFWs only have a limit of P100,000.

          I wish this law was passed the year before I applied for a retirement plan with Manulife.  As it is, the terms of my plan are worded in such a way that the earlier I terminate the plan, the smaller cash I get.  For example, if I terminate my plan now due to an emergency, I will only get something like P700 out of the P40,000 I've contributed so far.  With the PERA, premature distribution of funds has a penalty of only 10% of the amount distributed, and this does not even apply if the withdrawal is due to medical expenses, first time home purchase, qualified college expenses, and subsistence for contributors with disability.

          Now, the next step is education of the masses on how they can take advantage of this law.  And since I still consider myself and my blog readers as part of the masa, I'm doing my part and disseminating the info.    Don't take my word for it.  Read up on the law.  It's out there somewhere in Google.









= = = = = = = = = =

photo credit: http://www1.istockphoto.com/file_thumbview_approve/372426/2/istockphoto_372426_philippine_currency.jpg