GOP Policy Pokes at Retirement Provisions

By Andrew Remo • July 13, 2016 • 0 Comments
Republicans in the House of Representatives recently finalized the last plank of their policy agenda, with the release of their comprehensive tax reform blueprint.

The bold plan calls for significant cuts in the statutory tax rates on both the wage and investment income for individuals — a move that could well reduce the incentive for business owners and other workers to save for retirement through the current workplace savings arrangements available in the tax code.

Additionally, the blueprint pledges to “continue the current tax incentives for savings” while directing the House Ways and Means Committee — the committee in the House that writes the tax laws – to “consolidate and reform the multiple different retirement savings provisions in the current tax code to provide effective and efficient incentives for savings and investment.” So while the current retirement savings vehicles — like the 401(k) — will not be removed from the tax code under the House Republican plan, those vehicles could be combined into one “cookie cutter” approach. That might, or might not, mean significant changes for the 401(k), but 403(b)s, and potentially even 457(b) programs could be subjected to changes that would render them more like their 401(k) brethren.

The blueprint is politically significant in that it reflects the tax reform parameters and specific ideas of the new Republican leaders in the House of Representatives, namely current Speaker of the House and immediate past Ways and Means Committee Chairman Paul Ryan (R-Wisc.) and the current Ways and Means Committee Chairman Kevin Brady (R-Texas). (Chairman Brady led the task force that produced the report.)

The blueprint also directs the Ways and Means Committee to “explore the creation of more general savings vehicles” like so-called Universal Savings Accounts outside the employer based savings system in which account holders could withdraw both contributions and earnings at any time, and for any reason, without tax penalties. Legislation has been introduced in Congress that would create this new savings vehicle, which would seriously diminish the relevance of individual retirement accounts (IRAs) and possibly even workplace based savings arrangements.

Other Provisions

The blueprint also calls for the consolidation of the current seven income tax brackets into three — 12%, 25%, and 33% — with a maximum tax rate of 25% on small business income for those businesses that choose to organize as pass-through entities. The plan also calls for a complete repeal of the individual alternative minimum tax (AMT) and any estate or generation-skipping gift taxes. For investment income, the plan allows individuals to deduct 50% of their net capital gains, dividends, and interest income which leads to effective investment income tax rates of 6%, 12.5%, and 16.5% depending on the individual’s income tax bracket.

The blueprint doubles the standard deduction and replaces the current personal exemptions in the tax code with an increased child tax credit. The plan still maintains some form of the mortgage interest deduction, the charitable contribution deduction, an earned income tax credit, and higher education tax credit but notes that the number of individuals that itemize their deductions will decrease dramatically (from the 33% of taxpayers that itemize under current law to about 5% under the plan) due to the increased generosity of the new standard deduction.

Now that the parameters are set, expect the Ways and Means Committee staff to be hard at work for the rest of 2016 putting this blueprint into legislative language to be ready to go at a moment’s notice in 2017.

Andrew Remo is the American Retirement Association’s Director of Legislative Affairs.