Here's What the Proposed Retirement Savings Changes Could Mean to You
House Ways and Means Committee Chairman Kevin Brady recently said that an outline of the much-anticipated "Tax Reform 2.0" legislation will be released next week. While some parts of the next round of tax changes are unlikely to gather serious bipartisan support, the proposed changes to retirement savings could.
With that in mind, here's an overview of what we know so far, and why this part of Tax Reform 2.0 may have a legitimate chance of getting through Congress.
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What changes are being proposed?
The so-called Tax Reform 2.0 is a combination of several bills — three, according to the latest information. One would contain provisions to make the recent tax rate cuts for individuals permanent, instead of expiring in 2025 as they're currently set to do.
Another bill is specifically intended to make changes to retirement savings in the United States. Known as the Retirement Enhancement and Savings Act, the bill would make some pretty significant changes. While a draft of the bill hasn't been made public yet, here's what we know about the changes it could make:
- Some of the changes are intended to make it easier for smaller companies to offer 401(k) plans. For example, one provision would allow smaller employers to jointly offer 401(k) plans, thereby spreading out the administrative costs and lowering fees. Plans from smaller employers tend to come with significantly higher fees than those from larger companies, so this could help level the playing field. In addition, the bill would increase the annual tax credit designed to offset small business’ costs of starting new retirement plans from $500 to as much as $5,000.
- The bill would also make it easier for workers to guarantee their annual income by requiring plans to disclose the amount of monthly annuity income participants could expect to get based on their account balance. It would also encourage 401(k) plans to offer annuities by providing certain legal protections that currently don’t exist.
- The bill would give employees to pre-emptively save some of their tax return into their 401(k) plans and would also make it easier for employers to automatically enroll employees in their plans.
- The bill supposedly contains a new type of retirement savings account. While we know it would be more of an “open-ended” account than those currently available, we don’t have many details yet, other than that it would be easier for account owners to use their funds in an emergency.
- The bill would repeal the rule that prohibits people over age 70 1/2 from contributing to traditional IRA accounts. Currently, traditional IRA contributions cannot be made beyond this age, even if the account owner is still working. There’s currently a required minimum distribution provision that goes into effect at this age, and it’s unclear as to whether this would be repealed as well.
Does the bill have a fighting chance of passing?
The chances of passage depend on whom you ask, but there certainly seems to be a legitimate chance that this bill, in one form or another, could make it through Congress. One of the big reasons that Tax Reform 2.0 is being split into several bills is that certain items have better chances of passing than others do, and the retirement savings changes are among the more popular on both sides of the aisle.
Retirement changes, especially those designed to help small businesses, actually have quite a bit of bipartisan support. In recent comments, Brady said the retirement bill has the backing of the top Republican and the top Democrat on the Senate Finance Committee.
Stay tuned next week
As I mentioned, Brady said that an outline of Tax Reform 2.0 would be released to committee members in the coming week, so we could get a little more clarity about the Retirement Enhancement and Savings Act soon. And with a realistic chance of passing, the bill could end up making some key changes that could significantly affect you. To be clear, the outline that you see next week is likely to evolve before it's voted on, but this is certainly worth following for anyone saving (or planning to save) for their retirement.
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