The recent taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform bill left the taxation of household savings, including retirement savings accounts, largely unchanged. Last Thursday, Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) introduced the Retirement Enhancement and Savings Act of 2018 (RESA), a bill designed to encourage retirement savings, add flexibility to Multiple Employer Plans (MEPs), and make several other changes. Though this legislation includes a wide variety of changes to retirement savings policy, it falls short of offering more comprehensive solutions, like universal savings accounts, that would simplify how the tax code treats saving and help remove the tax code’s bias against saving.
Under the current system, a large portion of retirement savings are rightly subject to just a single layer of personal income taxation, but subject to an extremely complex and confusing regulatory structure. For example, there are almost a dozen tax-neutral retirement savings accounts, each with its own set of rules and restrictions. And, saving outside of tax-neutral retirement vehicles is subject to multiple layers of taxation, which reduces the after-tax return to saving. This treatment is nonneutral and creates a bias that favors immediate consumption over saving, the effects of which are harmful to individual financial well-being as well as economic growth.
The changes proposed in RESA indicate that lawmakers recognize that many Americans are not saving enough to maintain their current standard of living once they reach retirement and that access to tax-neutral savings should be expanded. RESA is similar to the Retirement Enhancement and Savings Act of 2016, which unanimously passed the Finance committee in 2016. Summaries of the 34 modifications the current version would make to retirement savings, as well as how the 2018 bill has been updated from the 2016 version, can be viewed here.
The bill is largely designed to encourage small businesses to adopt retirement plans. For example, it would expand access to MEPs, which would allow small businesses to enjoy economies of scale by pooling together to share the costs and administrative burdens of adopting a retirement savings plan. It would also expand a credit for small business retirement plan startup costs and create a credit for small businesses that add an auto-enroll feature to their plans.
RESA would also make changes to a wide variety of other restrictions and rules. For example, it would remove the 10 percent cap that applies to automatic increases in employee contribution rates in auto-enrolled plans. Interestingly, though RESA would remove a prohibition that prevents individuals who have reached age 70½ from contributing to traditional Individual Retirement Accounts (IRAs), it keeps a rule that individuals reaching that age must begin taking Required Minimum Distributions from their IRAs. The bill would clarify safe harbor rules for employers, making it easier for them to offer annuity options for retirees, and it would permit these types of retirement options to be rolled over into an IRA offering similar benefits; for example, when an employee moves to a new job or when plan rules change.
And, in an effort to encourage individuals to save more, the bill would require at least once a year that benefit statements include a lifetime income disclosure. This disclosure would illustrate what level of retirement income a saver should expect to receive during retirement based on their current account balance, similar to a disclosure that some government employees receive, showing how much monthly income their savings would generate in retirement.
Expanding access to tax-neutral retirement accounts would be beneficial for many Americans, and the more Congress does to reduce the burden on saving, the more people will save. Though RESA would make several changes, it largely maintains the current structure and regulations facing retirement savers today, as well as the biased tax treatment of savings outside of tax-neutral retirement vehicles. Legislative efforts should be designed to simplify the entire system, reduce the tax burden on all saving, and make the tax code neutral between immediate consumption and future consumption, which could be better achieved through traditional-style universal savings accounts.
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