House Republicans took the first shot at tax reform with the release of the Tax Cuts and Jobs Act on November 2. Now it is the Senate’s turn to weigh in. Not surprisingly, the Senate’s take on overhauling the tax code looks very different than the House version. You may wonder how your retirement account may be affected. Here are some highlights.
As the details of the Senate plan are released, when it comes to IRAs, there appears to be one significant difference. Missing from the Senate’s version of tax reform seems to be the provision that would eliminate IRA recharacterizations after 2017. This was included in the House proposal and if passed would mean that the conversions would become irrevocable. With this provision not included in the Senate version, those looking to use the recharacterization strategy in the future may be able to breathe a little easier.
The Senate and the House proposals are both currently in agreement that “Rothification” is off the table for now. The Senate bill, like the House bill, keeps current rules for pretax deferrals and contributions retirement accounts intact. There are no rules proposed in either the House or Senate that would require after-tax accounts.
Other ways that your retirement account could be affected by the Senate proposal include the following:
· The Senate bill includes provisions limiting catch-up contributions to plans for higher income individuals. Under the proposal, an employee would not be able to make catch-up contributions for a year if the employee received wages of $500,000 or more for the preceding year.
· The proposal would apply a single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer.
· The Senate bill would keep the deduction for medical expenses that the House version would do away with. Keeping the deduction would preserve the current exception to the 10% early distribution penalty from retirement accounts for medical expenses.
· The Senate version of tax reform would impose the 10% early distribution penalty on withdrawals from governmental 457(b) plans. This was not included in the House bill.
With two very different takes on tax reform duking it out in Congress, what is ahead for your retirement account? The answer to that question is still unknown at this point. You can expect to see tough battles ahead before any tax reform proposals including those affecting retirement plans become a reality. At The Slott Report, we will be closely following all developments. Stay tuned.