On June 24, a document described as a blueprint for tax reform, entitled “A Better Way: Our Vision for a Confident America,” was released by the congressional Republican leadership. This document outlines comprehensive changes to the Internal Revenue Code as envisioned by the Republican leadership. Its aims include Tax Code simplification and generally reduced tax rates for corporations and individuals. A consequence could be changes to saving incentives, changes considered necessary by its authors in order to offset tax revenue lost in the tax rate reduction process.
Serious tax reform efforts are not expected before the next presidential administration takes office, and it generally is acknowledged that tax reform will be controversial enough to require either a level of bipartisanship not seen recently in Congress, or sufficient majorities in House and Senate to pass legislation over minority opposition.
This blueprint document does not contain the level of detail that would be found in actual legislation, but some conclusions and educated speculation can be drawn from the details that are present. It should be remembered that all legislative proposals—especially those that have the far-reaching implications of major tax reform—are likely to be modified in the legislative process. Following are findings from a preliminary examination of this proposed tax reform document.
Traditional IRA Contributions
Itemized tax deductions would be eliminated, except those for home mortgage interest and charitable giving. This would clearly affect deductible IRA contributions. No mention is made of the future of Roth IRAs.
Employer Sponsored Retirement Plans
The tax reform proposal does not provide details, but states that “…this blueprint will continue tax incentives for retirement savings…The Committee on Ways and Means will examine existing tax incentives for employer-based retirement and pension plans in developing options for an effective and efficient overall approach to retirement savings.” Consolidation of the several existing plan types is expected.
Possible New Individual Saving Option
After describing the IRA and retirement plan options currently available, the blueprint document states, “The Committee on Ways and Means will explore the creation of more general savings vehicles…and will work to consolidate and reform the multiple different retirement savings provisions in the current tax code.” The document endorses by example a so-called “Universal Savings Account,” one that was proposed in 2015 legislation. Some of the features of those accounts as described in that legislation are as follows.
- Contribution limits would resemble current IRAs, subject to COLAs; no earned income requirement is specified.
- No deduction would be granted for contributions, but earnings would be available tax-free at any timeunless the account becomes disqualified. As proposed, there are no incentives to preserve assets long-term for retirement.
- Familiar IRA investment, custodianship, reporting, prohibited transaction, and non-forfeitability rules would apply to these accounts.
- Every citizen or legal permanent resident age 18 or older would be eligible.
- USA accounts would terminate upon account owner death.
Education Savings Benefits
The tax reform blueprint points out that there are a number of different and overlapping education tax benefits available to American taxpayers. Its only specific proposal is that, beyond the goal to “simplify and consolidate the current tax law provisions,” the blueprint would include for college and vocational training “a savings incentive such as 529 plans.”
Health Savings Accounts
While the blueprint does not include HSA contributions among the tax deductions that would be retained (only home mortgage interest and charitable giving are named), the document states that “health savings accounts…are major components of our nation’s health care system and are addressed in the context of the (congressional) Health Care Task Force.” This implies HSAs will be addressed by another congressional group, in a document other than this tax reform blueprint.
Barb Van Zomeren is Vice President, ERISA, at Ascensus, Inc., which has one of the largest ERISA consulting teams in the country. Barb’s team monitors all legislation, regulatory pronouncements, and industry developments affecting retirement plans and ensures that these developments are reflected in Ascensus’ products and services. For the latest from Ascensus’ ERISA team, please visit the Compliance & Industry News section of Ascensus.com.
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