The House recently passed a package of legislation that could change the way people save for retirement. That is, of course, if the Senate passes the new tax changes as is, which experts say isn’t likely.
The biggest changes include making the tax cuts passed last year permanent for individuals (they currently sunset in 2025), expanding retirement and education accounts, and creating tax-advantaged Universal Savings Accounts to accompany retirement accounts.
Individual Tax Cuts
The Protecting Family and Small Business Tax Cuts Act of 2018 would ensure that the doubled standard deduction and increased child tax credit that were part of the original Tax Cuts and Jobs Act passed last year are permanent. The original tax bill didn’t make the individual tax cuts permanent in order to pass the Senate’s budget reconciliation rules (the business cuts were made permanent in the original bill); this would aim to correct that.
Retirement Simplification
The Family Savings Act is where things get interesting. This bill would remove the 70 1/2 age limit on IRA contributions and exempt those who have less than $50,000 in their accounts from taking required minimum distributions (RMDs) which start at 70 1/2 (again, this is for IRAs and 401(k)s—Roths don’t have these requirements currently), and decrease RMDs for those with larger balances.
Additionally, families would be allowed to withdraw up to $7,500 penalty-free from retirement accounts if it’s used to pay for things for a new child (including adopted children).
Universal Savings Accounts
The bill also proposes universal savings accounts, which would be similar to Roth IRAs: People would be allowed to save and invest up to $2,500 per year with after-tax money, and withdrawals of contributions and investment gains could be made tax-free for virtually any reason. They would essentially be sidecar savings account, which Lifehacker has written about before. This is a pretty sensible idea, in theory, to help America’s savings deficit and reduce reliance on 401(k) loans, which come with hefty fines.
One thing to keep in mind, as Mark Iwry notes in The Hill, is that “high-income people would universally take advantage of this new tax break—mostly without saving more—by shifting taxable savings into the new vehicle.” Meanwhile, lower income people will have a more difficult time saving in the universal savings account in addition to a retirement account, though they would certainly benefit them as well.
There are a few other things that the bills do for small businesses (such as making it easier for small businesses in different industries to partner in a single retirement plan to lower fees), but the simplifying of deferred-retirement accounts and the addition of the universal savings accounts are the headlines for most individuals. Now it’s on to the Senate.