United States

Proposed Tax Reform 2.0 includes retirement and savings plan changes

TAX ALERT  | 

As part of an expected “Tax Reform 2.0” package, the House Ways and Means Committee released three bills on September 10. According to a press release from the House Ways and Means Committe, the longest of those bills, the Family Savings Act (The Act, H.R. 6757), is motivated by, “…creating financial security." Futher, Committe Chairman Kevin Brady, says "The Family Savings Act focuses on helping families save more and earlier for the future by making it easier for businesses to offer retirement savings plans while ensuring workers can easily participate in these plans. This will help give our families the financial stability they need for whatever life throws their way.” 

The Act includes several provisions that modify existing rules for various qualified retirement plans. In general, qualified retirement plans have special tax treatment under current law that allows individuals to set money aside for the future and defer the tax until that later time when the money is taken out of the retirement account. Because of the tax-deferred nature of this income, several limitations apply such as the amount that can be set aside tax-deferred and the timing in which it can be removed.

There are several different types of long-term savings plans, each with its own separate rules. These include pensions, individual retirement accounts (IRAs) and Roth IRAs, and 401(k) plans. There are alsospecial plans for tax-exempt organizations, churches, and the government. Some of the changes in the Act apply only to these special plans and are not discussed in this preliminary discussion of the Act.

Among the modifications included in the Act are:

  • Rules expanding the use of multiple employer plans offered by pooled plan providers.
  • Easing of timing rules for electing safe harbor 401(k) status.
  • Treatment of certain taxable fellowship and stipend payments as compensation for IRA purposes. Currently, IRA and Roth IRA contributions can only be made from earned compensation, which does not include fellowship and stipend payments.
  • Repeal of the maximum age for traditional IRA contributions. Currently, contributions to a Traditional IRA are not allowed after age 70 ½, even though many individuals now work past age 70.
  • Portability of lifetime income investments.
  • Exemption from required minimum account distributions for individuals with aggregate retirement account balances under $50,000. Currently, Traditional IRAs and most qualified retirement arrangements are required to make annual minimum required distributions from IRAs or plans starting when the covered individual reaches age 70 ½.
  • Extension of time to adopt an employer-sponsored retirement plan until the tax filing deadline (including extensions) for the taxable year.
  • Changes to nondiscrimination testing for closed classes of participants so benefits are protected for older, longer service participants.
  • Creation of Universal Savings Accounts to allow individuals to save up to $2,500 based on the individuals compensation for the year. The contributions are made into a tax-exempt account with tax-free growth and, apparently, penalty-free future distributions.  It appears that the contributions to the Universal Savings Accounts are made with after-tax dollars. Unlike IRAs and Roth IRAs, which are subject to penalties for early withdrawal (before age 59 ½), the Universal Savings Accounts allow individuals to put aside amounts when they can, and take out amounts when needed. As with IRAs, a spouse can make a contribution for a non-working spouse.
  • Allowing tax-free distributions from section 529 plans for apprenticeship programs, certain homeschooling expenses, payments for qualified education loans, and for elementary and secondary education.
  • Penalty-free withdrawals from retirement plans up to $7,500 following the birth or adoption of a child.

At this time, the prospects for enactment of any of the measures included in this bill, or other parts of Tax Reform 2.0, are quite uncertain. There may be a mark-up by the House Ways and Means Committee and a vote by the full House as early as September, but active Senate consideration of these measures is not currently expected. Nonetheless, if it should move forward, or if any of the provisions included should surface in other bills in the future (which is always possible), every provision included in the Family Savings Act is taxpayer favorable, whether it eases burdens on employers who sponsor many retirement plans or alleviates restrictions in individual savings methods.

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