Congress is moving ahead with bipartisan legislation that
could significantly impact taxes related to retirement accounts.
The Enhancing American Retirement Now (EARN) Act has many
tax and retirement provisions, including extending the beginning age for
required minimum distributions (RMDs) to 75 and allowing 401(k) assets to be
used for long-term-care insurance.
Both the Senate and House have passed versions of EARN. It
and the Securing a Strong Retirement Act bills are expected to make up SECURE
Act 2.0, which is expected to pass later this year.
“We don’t know at the moment what final legislation will
look like [but] many of the provisions in the bill enjoy broad support,” said
Shamisa Zvoma, a CPA and tax principal at Friedman LLP in New York.
Experts said the changes could generally benefit taxpayers,
though some aspects of the bill seem unneeded, such as the provision on
matching payments for elective-deferral and IRA contributions. Current law
provides for a nonrefundable credit for certain individuals who make
contributions to IRAs, employer retirement plans such as 401(k)s and ABLE
(Achieving a Better Life Experience) accounts. The proposal would change it
from a credit included in tax refunds to a government payment that must be
deposited into a taxpayer’s IRA or retirement plan.
“Do you think a couple making $50,000 pre-tax can even
afford to contribute to a retirement account?” said Bruce Primeau, a CPA and
president of Summit Wealth Advocates in Prior Lake, Minn. “How practical is
this provision given how small the government contributions will likely be?”
Morris Armstrong, an RIA and enrolled agent at Armstrong
Financial Strategies in Cheshire, Conn., said he has “mixed feelings”
concerning the long-term-care insurance funding provision, “but if it makes
people feel more secure in the purchase of LTC, it may be worthwhile.”
The EARN Act would allow account holders to take a
distribution of up to $2,500 per year for long-term care insurance and be
exempt from the 10% penalty for early distributions.
Armstrong also liked the provision for allowing public
safety officers to deduct up to $3,000 of medical insurance from their pensions
whether the premium was paid by the company or by the pensioner.
Another provision would let participants in 401(k)s and
other tax-preferred retirement plans that allow elective deferrals to
contribute an additional $10,000 (indexed) annually beginning between age 60
and 63 ($5,000 for Simple plans), effective after next year.
“The increase in catch-up contributions ... will impact
quite a few folks and give them a greater ability to pour more pre-tax dollars
into retirement accounts,” Primeau said. “The act also discusses indexing the
IRA catch-up limit for those age 50-plus [currently $1,000], which means folks
could contribute more to IRA accounts as well.”
SECURE 2.0 would also allow employees to provide matching
contributions based on employees' student loan payments.
“The idea of allowing a student loan repayment to qualify
for a matching employer contribution has some merit,” Armstrong added.
Expansion of Roth post-tax contributions to cover SEP
(simplified employee pension) and SIMPLE (Savings Incentive Match Plan for
Employees) IRAs will allow many clients to take advantage of tax-deferred
growth that a Roth IRA offers, Zvoma said. Current law doesn’t permit a Roth
option for SEP and SIMPLE contributions. “Employer matching contributions would
now also be allowed on a Roth post-tax basis,” she added.
“I really like the idea of having catch-up contributions to
employer plans go to the Roth portion of the employer plan,” added Mary Kay
Foss, a CPA in Walnut Creek, Calif.
EARN may let advisors help clients in other ways.
The legislation, for example, requires the Treasury to
create a "lost and found" database that would help account holders
and their beneficiaries to recover assets from employer retirement plans.
“Many people change jobs these days and their former
employers may not know where they are,” Foss said. “This will allow advisors to
help their clients find lost benefits.”
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