Congress is moving ahead with bipartisan legislation that could significantly impact taxes related to retirement accounts.
The Enhancing American Retirement Now (EARN) Act has many tax and retirement provisions, including extending the beginning age for required minimum distributions (RMDs) to 75 and allowing 401(k) assets to be used for long-term-care insurance.
Both the Senate and House have passed versions of EARN. It and the Securing a Strong Retirement Act bills are expected to make up SECURE Act 2.0, which is expected to pass later this year.
“We don’t know at the moment what final legislation will look like [but] many of the provisions in the bill enjoy broad support,” said Shamisa Zvoma, a CPA and tax principal at Friedman LLP in New York.
Experts said the changes could generally benefit taxpayers, though some aspects of the bill seem unneeded, such as the provision on matching payments for elective-deferral and IRA contributions. Current law provides for a nonrefundable credit for certain individuals who make contributions to IRAs, employer retirement plans such as 401(k)s and ABLE (Achieving a Better Life Experience) accounts. The proposal would change it from a credit included in tax refunds to a government payment that must be deposited into a taxpayer’s IRA or retirement plan.
“Do you think a couple making $50,000 pre-tax can even afford to contribute to a retirement account?” said Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “How practical is this provision given how small the government contributions will likely be?”
Morris Armstrong, an RIA and enrolled agent at Armstrong Financial Strategies in Cheshire, Conn., said he has “mixed feelings” concerning the long-term-care insurance funding provision, “but if it makes people feel more secure in the purchase of LTC, it may be worthwhile.”
The EARN Act would allow account holders to take a distribution of up to $2,500 per year for long-term care insurance and be exempt from the 10% penalty for early distributions.
Armstrong also liked the provision for allowing public safety officers to deduct up to $3,000 of medical insurance from their pensions whether the premium was paid by the company or by the pensioner.
Another provision would let participants in 401(k)s and other tax-preferred retirement plans that allow elective deferrals to contribute an additional $10,000 (indexed) annually beginning between age 60 and 63 ($5,000 for Simple plans), effective after next year.