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7 key changes to retirement plans under the House and Senate tax bills

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Retirement industry professionals have been following the tax legislation with great interest.  The Senate passed its version of the tax bill on Saturday, though the bill is not yet finalized. Saturday’s vote means the Senate and House have passed similar tax reform plans, but negotiators from both chambers have to agree on a single piece of legislation that both chambers must approve before it is sent to the president for his signature.

Here are 7 key changes the Senate and House tax plans make to retirement plans:

1. Both the House and Senate bill would eliminate so-called Roth re-characterizations

Under current law, a conversion from a traditional IRA to a Roth IRA can be undone, or reversed, if participants find they don’t have the cash to cover the tax bill from moving pre-tax savings to a Roth account.

The House summary of the provision explains the provision’s rationale this way:

“This provision would prevent a taxpayer from gaming the system by, for example, contributing or converting to a Roth IRA, investing aggressively and benefiting from any gains (which are never subject to tax), and then retroactively reversing the conversion if the taxpayer suffers a loss so as to avoid taxes on some or all of the converted amount.”

The Joint Committee on Taxation estimates the provision will add $500 million in revenue over the 10-year budget window.

2. More time to pay back 401(k) loans

Under current law, a plan participant who leaves an employer with an outstanding 401(k) loan in hand has 60 days to repay the loan if they are to avoid the 10 percent excise tax.

Both the House and Senate bill would extend the grace period to repay loans until the day they file their next tax return.

3. Leveling age for in-service distributions among all defined contribution plans

Under current law, 401(k) in-service plan distributions are permitted for participant once they reach age 59½.

But participants in government-sponsored 457(b) plans must be age 62 to qualify.

A provision in the House bill would allow 457(b) plan participants to take in-service distributions at age 59½.

“The provision would encourage Americans to continue working full or part-time instead of retiring early in order to access retirement savings at age 59½. Under current law, many employees choose to retire instead of continuing to work because they cannot otherwise access their retirement accounts,” according to a summary of the provision.

The JCT says the provision would raise $13.1 billion over the 10-year budget window.

4. Participants can continue to contribute to plans even with an outstanding hardship loan

Under current law, participants who have taken a hardship distribution are prohibited from contributing to retirement plans for six months.

A provision in the House bill would repeal that law, allowing those with hardship loans to keep contributing to savings plans.

“The provision would help Americans save for retirement by making common-sense reforms to remove harsh rules that often trap individuals and families going through difficult financial circumstances,” according to a summary of the provision.

The JCT says the revenue impact would be negligible.

5. More generous hardship distributions

Under current law, hardship loans can only be made from participant contributions.

Under a House provision, employers would have the option of allowing hardship distributions from participant contributions and employer contributions, as well as from the money earned on investment gains.

The JCT says the provision would add $700 million in revenue over the 10-year budget window.

6. Leveling contribution limits among all defined contribution plans

Under existing law, participants in 403(b) defined contribution plans benefit from extra annual contribution allowances. Participants with 15 years of service to an employer can contribute an extra $3,000 a year. And employer sponsors can contribute to savings accounts for five years after a participant retires.

Under the Senate rule, those extra contributions to 403(b) plans would be eliminated. All defined contribution plans—401(k), 403(b), and 457(b) plans—would be subject to the same annual contribution limits.

7. Individuals held harmless on improper levy on retirement plans

Under current law, early distributions from traditional defined contribution plans and IRAs are subject to a 10 percent tax.

Sometimes, the IRS mistakenly taxes retirement savers. When they do, the levy is returned to savers, with interest.

Under a proposal in the Senate bill, savers would be able to re-contribute the money Treasury returns back into qualified plans without counting against annual contribution limits.

 

Source: BenefitsPro, by, Nick Thornton

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