The GOP’s Tax Reform 2.0 package would allow more companies to offer retirement plans while also making individual tax cuts permanent.
On the heels of last year’s tax bill, House Republicans are proposing additional measures that they hope will spur economic growth. The package includes proposals to make permanent the individual and small business tax cuts in last year’s bill, and revise regulations governing retirement savings accounts.
Introduced in the House Ways and Means Committee in mid-September, the three bills were expected to be considered by the full House this month. However, Committee Chairman Kevin Brady (R-TX) told CNBC it was unlikely the Senate would vote on the bills prior to the November midterm elections.
If passed, the GOP’s Tax Reform 2.0 plan would impact how Americans save in general and for retirement specifically. Accordingly, insurance agents whose clients are gearing up for retirement should understand how these proposed changes might affect investment portfolios and long-term planning.
Tax Reform 2.0
One of the bills, the Family Savings Act of 2018, mirrors a recent executive order from President Trump that aims to make it easier for small businesses to band together to offer retirement plans for their employees. Under this proposal, benefit statements would be required to spell out what plan participants would receive monthly once they retire.
This bill would also remove the required minimum distribution (RMD) retirees must take from their retirement accounts if the account has a balance less than $50,000. In addition, it includes a provision that would allow people at age of 70 and a half to contribute to their IRAs. After the birth or adoption of a baby, families could also withdraw funds from their retirement savings without incurring a penalty.
In the previous tax overhaul, the reduction in individual tax rates and a doubling of the child tax credit had an expiration date of 2025. The Protecting Family and Small Business Tax Cuts Act makes those individual tax cuts permanent and locks in the 20% pass-through deduction for small businesses.
Lastly, the American Innovation Act of 2018 gives special attention to the startup market. Under this measure, fledgling businesses would be permitted to write off a greater portion of their initial startup costs and bring in more investment capital while still being able to receive certain tax breaks.
What It Could Mean for Your Clients
Although the GOP’s Tax Reform 2.0 package has yet to pass the Senate, the proposals have widespread support among Republicans. If they become law, your clients may have access to a retirement savings plan even if they work for a small business. For your retired clients, the lifting of RMD limits would enable them to keep more of their savings in a retirement account where the money grows tax-deferred.
Your clients who operate small businesses through S corporations or limited liability companies would benefit from the lower pass-through deduction as well. Under previous pass-through regulations, profits from a small business would “pass through” to the owner and would be subsequently taxed at the individual rate, which reached as high as 39.6%. Last year’s tax bill reduced that rate to 20%, while the GOP’s latest proposal would make that rate permanent.
With so much talk of tax reform, your clients will likely want to know how these changes might affect planning for their golden years. As their advisor, you can monitor political developments and let them know what might change. If the proposed legislation becomes law, you’ll be prepared to help clients reap the benefits.