Senate Tax Reform Success Sets Up High Stakes Conference Committee Process

With the passage of the Senate’s version of tax reform, the stage is set for a bicameral conference committee process through which a select group of legislators will try to rectify the House and Senate bill texts.  

At nearly 2 a.m. on Saturday morning, the GOP leadership in the U.S. Senate called for a vote on the Tax Cuts and Jobs Act; with another version previously passed by the U.S. House of Representatives, the success of the proposal in the Senate pushes the tax reform effort into the crucial conference committee phase.

Washington watchers will be familiar with the mechanics of a conference committee: A select group of highly placed legislators will meet in the coming weeks to try to combine and otherwise edit the House and Senate bill texts into a single common form. Should House and Senate GOP leaders successfully craft a joint version of the Tax Cuts and Jobs Act that meets their respective demands, the full House and Senate will then be given the chance to vote on the final bill, which could subsequently be submitted for the president’s signature.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

At this stage, it still somewhat difficult to predict the final form any new tax laws could take, experts agree. In fact, many of them are still digesting the hundreds of pages of legislative text comprising the dueling proposals, and they remain wary of making strong predictions given the real potential for substantial amendments.

A few things seem clear so far, including that retirement plans are largely left alone by both bills. By way of background, both the preliminary versions of the House and Senate  proposals would have made major changes to the treatment of deferred compensation for executives and highly paid employees. However, following the earliest stages of debate, both the House and the Senate backed away from the proposed changes to deferred compensation arrangements, as well as from other retirement-industry focused proposals. For example, the initial House and Senate bills both were amended to strike new limitations of catch-up contributions for high-wage employees, and to eliminate a proposal to implement a 10% penalty tax for early withdrawals made prior to age 59½ from governmental section 457(b) plans.

Given that many retirement plan sponsors are also business owners, the industry will be closely watching how the conference committee treats “pass through taxes.” Speaking broadly, under current law such income is taxed at the regular personal income tax rate per the amount of income drawn in a given year. As laid out in some early comparative analysis shared by the Heritage Foundation, the House bill as passed caps the maximum tax rate for pass-through income at 25%, “subject to special rules that effectively raise the tax rate.” On the Senate side, deductions are “allowed for 23% of qualifying pass-through income, but no other preferential rate is set.” Where the common ground may be on this issue and others, again, remains to be seen.

Offering some preliminary commentary on the forthcoming conference process, which Congressional leaders hope to wrap and deliver to taxpayers by Christmas, David Musto, president of independent retirement and college savings services provider Ascensus, says he seems some positive and negative aspects for the retirement plan industry and its clients.

“It is important to acknowledge the many unknowns remaining in this process,” he observes. “While both versions of the bill tout tax cuts, the question remains, will more disposable income lead to more savings across the board?”

Musto feels both the House and Senate bills respect the importance of tax-advantaged retirement plans to the wealth generation of average Americans.

“While both bills have some provisions seeking to simplify use of retirement plans, greater access to plan assets via hardship distributions and broadened options for in-service withdrawals may increase the use of assets for non-retirement purposes,” he warns.

Being in the business of servicing 529 plans, Musto is naturally encouraged by provisions included in the Senate bill to promote tax-advantaged college savings to meet elementary and secondary school tuition. Also included in the Senate bill is the ability to roll 529 assets into ABLE programs for disabled savers.

Among his concerns is the Senate’s choice versus the House to eliminate the Affordable Care Act’s so-called individual health insurance mandate via tax reform. This could place a larger financial burden on consumers without health coverage, he fears.

More Than One-Third of U.S. Households Own IRAs

Over three-quarters purchased their IRA through an investment professional.

More than one-third of U.S. households owned an individual retirement account (IRA) in mid-2017, according to research by the Investment Company Institute (ICI).

Traditional IRAs remain the most popular type of IRA, owned by 28% of U.S. households. The next most common is Roth IRAs, held by 10% of U.S. households. The third most common is employer-sponsored IRAs, owned by 6% of U.S. households.

Among traditional IRA-owning households, 77% purchased them through an investment professional, be that a full-service brokerage, financial planning firm, bank, savings institution, or insurance company. Thirty percent made these purchases through direct marketing sources, including mutual fund companies and discount brokerages.

“U.S. households have access to a full range of investment options for opening their IRAs,” says Sarah Holden, senior director of retirement and investment research at ICI. “This level of accessibility is one of the most popular features of IRAs as a vehicle for retirement savings.”

Rollovers are the most common creation method for people opening an IRA, with 57% of traditional IRA-owning households having opened their IRA through this method. The majority transferred their entire retirement plan balance into the IRA.

Asked why they rolled their assets over from a 401(k) or other type of employer-sponsored retirement plan, 63% said it was because they did not want to leave their assets with a former employer, 59% said it was to preserve the tax treatment of their savings, 58% wanted to consolidate assets, and 49% wanted access to more investment options.

The required minimum distribution (RMD) requirement is typically the impetus for taking money out of an IRA; among the 9.1 million traditional IRA-owning households that took a withdrawal in 2017, 71% said it was because of the RMD. Sixty-four percent consulted with a financial adviser to determine how much they should withdraw.

Asked what they used the money for, investors said it was for living expenses, to reinvest or move to another account, pay for a home purchase or repair or to cover health care costs.

ICI’s full report, “The Role of IRAs in U.S. Households’ Saving for Retirement, 2017,” can be downloaded here.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

«