In my 20-plus years in the retirement industry, I can’t recall a time when plan participants, plan sponsors, advisors and practitioners have had to prepare and digest so many breaking developments simultaneously, including: the Department of Labor’s fiduciary rule; state-run auto IRA plans; increased litigation; health savings accounts; and the (potential) impact of tax reform on retirement accounts. Then there’s the onslaught of headlines, such as you’re not saving enough, or you’re saving too much; rollover decisions; Social Security solvency; Roth versus pretax deferrals; Roth conversions; passive versus active investing; target-date funds—and more!
It’s been 31 years since major, sweeping federal tax reform legislation was enacted. It was called the “Tax Reform Act of 1986” (or “TRA ’86,” for short). Generally, major tax reform happens once a generation; prior (to 1986) tax legislation was enacted 32 years earlier, in 1954. So, viewed through such a historical lens, we are, or should be, right on schedule for tax reform.
Most of the chatter around TRA ’86 at the time was about lowering income tax rates, while narrowing the number of deductions to pay for the reduced rates. However, those of you who were in the retirement business back then may recall that retirement accounts were sacrificed for short-term gain—namely, that retirement accounts were, collectively, used as a revenue raiser. How?
Here is a non-exhaustive list:
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Maximum pretax salary deferrals were capped at $7,000—a 70 percent decrease.
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After-tax contributions became subject to the annual additional limit.
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Contributions to IRAs were made fully tax-deductible only for individuals who were not active participants in an employer-sponsored plan or whose adjusted gross income was less than certain thresholds. Prior to TRA ’86, all IRA contributions were deductible.
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There was a tightening of 401(k) nondiscrimination rules.
On April 26, the Trump administration released a brief outline on its much-awaited tax-reform plan. Up to that point, there was concern that we might be going “back to the future”—i.e., retirement accounts would be used to offset revenue shortfalls.
Of course, it’s hard to read much into the tax proposal so far, since it was short on specifics, long on wishes. But there is every reason to wonder how the plan would affect an individual’s retirement savings and overall retirement policy. For all the uncertainty, however, it was reassuring to hear a Trump economic advisor say “retirement savings will be protected.”
Instead, lost revenue, according to the proposal, will come from economic growth and by eliminating most itemized deductions, with notable exceptions including mortgage interest and charitable deductions.
Here are some of the changes being proposed: reducing the number of individual tax brackets from seven to three—10 percent, 25 percent and 35 percent—doubling the standard deduction for both those filing single and jointly; repealing the 3.8 percent Medicare surtax tax on various forms of investment income; reducing the corporate tax, from 35 percent to 15 percent ; and repealing the alternative minimum tax, to name a few.