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Last week, the Senate Finance Committee approved the Enhancing American Retirement Now (EARN) Act, moving closer to a potential agreement to reform retirement savings this year. That is one of several proposals recently introduced—including the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (RISE & SHINE)—that would improve the tax treatment of saving for households. Senate and House versions of the reforms would change incentives to save, simplify the tax treatment of saving, and could potentially impact inflation.
These proposed reforms to retirement savings accounts include the following major changes:
- Expand the saver’s credit by making it a flat 50 percent credit and increasing the income limits for credit eligibility;
- Allow student loan payments to qualify for employer matching contributions to retirement accounts;
- Standardize rollover forms to enhance portability of existing retirement accounts;
- Increase the required minimum distribution (RMD) age to 75 beginning after 2031
- Allow for employer emergency savings accounts alongside retirement accounts;
- Expand multiple employer plans (MEPs) and expand access to part-time workers; and
- Provide more transparency for lump sum buyout offers.
The proposal for emergency savings accounts included in RISE & SHINE is based on the Emergency Savings Act of 2022, offered by Sens. Cory Book (D-NJ) and Todd Young (R-IN), which would give employers the option of establishing workplace emergency savings accounts for employees of up to $2,500 in contributions. The accounts would be treated on a Roth basis, meaning contributions would be made after-tax and withdrawals and any growth could be used tax-free at any time. Emergency savings accounts would help reduce the incentive to take a loan against or liquidate retirement accounts, which are also often subject to penalties for early withdrawals.
To move forward, the Senate package would have to be reconciled with the House-passed SECURE 2.0 Act (Securing a Strong Retirement Act of 2021). The House package contains many overlapping but distinct reforms to raise the required minimum distribution age, require automatic enrollment in new retirement plans, increase catch-up contribution limits and require catch-up contributions be made on a Roth basis, and expand and simplify the saver’s credit.
Separately, Sen. Chuck Grassley (R-IA) along with Sens. John Barrasso (R-WY), Steve Daines (R-MT), James Lankford (R-OK), and Todd Young (R-IN), recently introduced the Middle-Class Savings and Investment Act. It would reduce the tax burden on saving by increasing the width of the 0 percent tax bracket for long-term capital gains and qualified dividends from about $89,000 to $178,000 for joint filers, excluding up to $1,200 in accrued interest from tax, eliminating the marriage penalty in the Net Investment Income Tax Brackets and indexing the brackets for inflation, and increasing the saver’s credit. The cost of the reforms would be offset by a three-year extension of the State and Local Tax (SALT) deduction, which would temporarily raise taxes on the return to saving.
The proposals share a common goal of improving incentives for households to save during a time when inflation is impacting their finances. The tax system currently encourages saving in a disjointed and complicated fashion, requiring households to understand the variety of rules and restrictions associated with different saving opportunities. Inflation can affect tax burdens; for instance, the Net Investment Income Tax (NIIT) levies a 3.8 percent tax on investment income for single filers with over $200,000 in income, or joint filers earning over $250,000. When considering cumulative inflation since the tax was first enacted in 2013, the NIIT would be expected to apply to single filers making over roughly $246,000, or joint filers making over roughly $308,000.
Indexing the thresholds for the NIIT, as in the Grassley proposal, would be a simple fix. Further, expanding access and limits on saving-consumption neutral vehicles also protects savers from paying taxes on inflationary gains.
The proposals currently under consideration fall short of ensuring all saving is treated neutrally, but would improve incentives to save and make important simplifications to the current retirement account system.