News outlets recently flooded social media with headlines
about the rise of “401(k) millionaires” in the wake of an analysis by Fidelity
Investments which touted the increased number of its 401(k) plans with at
least a $1 million balance. It is difficult to decipher whether this development
is a sign of individuals taking increased responsibility for funding their
retirement, the product of a strong investment market or some other combination
of factors. While it appears to show
that more people are saving significant funds for retirement, some are
questioning whether the government should be doing more to encourage retirement
savings.
In March, the Senate introduced a
bipartisan bill titled the “Retirement Enhancement and Savings Act of 2018”
(RESA, S. 2526), an updated version of a similar bill from 2016. While the likelihood of passing any important
bill during the upcoming election cycle is uncertain, there are aspects of this
bill that should be attractive to those on either side of the aisle. Coupled with the House of Representative’s Ways
and Means Committee’s release of “Tax Reform 2.0”, it appears that savings for
retirement and other life events are on Congress’s radar.
In my last
article on beneficiary designations, I raised one potentially controversial
provision of RESA around shortening the time period in which an account
holder’s beneficiaries must withdraw funds from an inherited retirement
account. There are some additional RESA
items, however, that may be more widely acceptable.
Under current law, an individual cannot make a contribution
to a traditional IRA after reaching age 70.5.
RESA would remove that limitation and allow individuals of any age to
make deductible additions to their IRA, assuming they otherwise qualify. With life expectancies increasing and
individuals working well into their seventies, often due to inadequate
retirement planning at an earlier age, encouraging continued contributions to a
retirement plan makes sense. RESA does
not, however, include any change in the provision that requires such
individuals to begin making withdrawals from their retirement accounts after
reaching age 70.5. If one of the
purposes of the proposed change is to recognize that individuals are working
longer to save for retirement, some wonder whether it makes sense to also
acknowledge that these individuals working beyond traditional retirement age might
not yet want to begin withdrawing from their retirement savings.
Another notable provision of RESA would give smaller
employers the flexibility to band together to form multiple employer retirement
plans (MEPs). Factors such as the cost
of setting up a plan and the ongoing compliance and maintenance of a plan are
barriers or perceived barriers to entry for many employers who would like to
sponsor a retirement plan. MEPs could significantly expand the number of
employees covered by an employer sponsored retirement plan as each employer can
have different plan designs and its own account within the pooled MEP. A version of MEPs already exists, but is
limited to those employers who share a characteristic such as membership in the
same trade group or some degree of common ownership that is not sufficient for
them to be treated as traditional “multiemployer” plans. RESA would significantly expand the number of
employers that could utilize a MEP, share administrative and compliance costs
and benefit a greater number of employees working for smaller employers whose
retirement planning options are limited.
While there are some complexities to MEPs, such as determining what type
of data must be tracked among all participating employers versus data counted on
an employer by employer level, the potential benefits may outweigh the costs. Employers
who have avoided instituting their own plans due to concerns about ongoing
investment decisions, tax filing requirements, potential audits and the cost of
initiating the plan, now may have retirement offerings that are within reach.
In turn, broader access to employer-based retirement plans would be a welcome benefit
to those employees who work for smaller employers which previously lacked these
resources.
While RESA is the most fleshed-out proposal on the table,
there are other indications that retirement accounts and similar savings
devices may get a facelift. For some,
there is tension between saving to start a family in the near future and the
long-off goals of retirement. Just when
some individuals begin moving into a position of more responsibility and more
pay, they are also thinking about saving for a house, saving for college or
providing for children. Such individuals
are understandably concerned about earmarking and locking up money for
retirement when there are more immediate concerns at hand.
While lacking in details, House of Representatives Ways and
Means Chair Kevin Brady (R-Texas) released Tax Reform 2.0 in late July which
sought to address some of these concerns.
This bullet-point “listening framework” is a follow up to the
Republican-sponsored tax bill passed in late 2017. At least part of Tax Reform 2.0 is focused on
expanding ways for individuals to save in a tax-advantaged manner while
allowing increased flexibility in the ways those funds are used.
One proposal included in Tax Reform 2.0 is a “baby-savings”
option. This proposal would permit families to make penalty-free withdrawals
from a retirement account to pay for expenses related to the birth or adoption
of a child. The individual could later
replenish the amount withdrawn from the account. Another provision would expand the breadth of
tuition-savings 529 plans, permitting parents to use the saved funds for their
children’s home schooling and apprentice fees if a child decides to learn a
trade rather than attend a traditional college or university.
A more sweeping concept in Tax Reform 2.0 calls for
“universal savings accounts”. While
retirement accounts, tuition-savings devices and health-insurance savings
accounts offer tax advantages, they all come at a cost relative to the
flexibility of accessing those funds.
Unlike these types of accounts, universal savings accounts would allow
for deposit of after-tax money into accounts that grow tax free and permit
withdraws to be made on a tax-free and penalty-free basis. While the proposal makes these accounts
available to anyone, it is likely that the benefits or use of such accounts
would be phased out by income level, a cap on the amount that may be
contributed and other criteria. Similar
plans have been instituted in other countries such as Canada and the U.K. While Republicans are generally fans of such
plans, others are critical of the concept.
One objection is that such accounts would merely result in those wealthy
enough to save money in taxable accounts moving those funds into nontaxable
accounts. As a result, tax revenues
might decrease. Critics also fear that
such accounts would make it easier for individuals to abandon retirement
planning all together in order to use saved funds to take care of emergency
items such as a new HVAC system or on luxury items such as vacations.
With concerns about the solvency of the social security
system and healthcare costs associated with retirement, there is significant
interest in encouraging Americans to save more. To many, the current retirement
savings system is complex and has a language all its own: industry specific
acronyms and terms such as SEPs, Roth-IRAs, 401k’s, profit sharing plans,
defined benefit plans, Keough plans, 403b plans, SIMPLE IRAs, RMDs, RBDs, 10%
penalties on early withdrawals, eligible rollover distributions, employer
matches, vesting schedules, and qualified beneficiaries are not easy to
understand and make retirement planning difficult to navigate. While it is
important to consider the potential political and economic implications of
revamping tax-advantaged accounts, a push for a greater level of simplicity in
savings vehicles and encouraging broader access to employer-sponsored
retirement are factors that could allow more Americans to work toward long-term
financial security.
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