110th CONGRESS, LEGISLATIVE ISSUES A - Z

ISSUE: The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)(P.L. 107-16) made many significant changes to the rules for retirement savings. For example, it raised Individual Retirement Account (IRA) and pension (401(k), 403(b) and other plans) contribution limits; created a temporary tax-credit for moderate-income savers ("Saver’s Credit"); and a small employer tax credit for the expense of establishing a pension plan. It also made rule changes to enhance portability, increase disclosure, and reduce complexity.

CUNA POSITION: CUNA was integrally involved in developing the pension reform proposals contained in EGGTRA and continues to work closely with members of the House and Senate to expand the availability and increase contribution limits to retirement savings vehicles. CUNA supports legislation that encourages more Americans to save for retirement.

OPPOSING VIEWS: It is argued that some people oppose the shifting away from defined benefit plans. There is also concern that too many tax breaks go to the wealthy who, some claim, don’t need such incentives to save.

IMPACT ON CREDIT UNIONS: Provisions that would further encourage more credit union members to save for retirement would benefit credit unions that offer IRAs and other savings products. In 2006, over half of all credit unions offered IRAs. In addition, the coming years will bring a huge growth in IRA demand as the baby-boom generation retires and seeks to rollover retirement savings from employer-based programs like 401(k)s and 403(b)s into IRAs.

STATUS/OUTLOOK: The President’s Advisory Panel on Federal Tax Reform issued its final report on November 1, 2005. The Panel recommended consolidating traditional and Roth IRAs into "Save for Retirement" accounts. These new accounts would be less restrictive by not placing income limits on those that choose to participate. The accounts would permit individuals to contribute up to $10,000 annually and that amount would be indexed for inflation in subsequent years. The accounts would grow tax-free but contributions would not be tax-deductible. Once the account holder reaches age 58, dies, or become disabled, distributions are not subject to federal taxation or penalties. Nonqualified distributions would be subject to taxation and also a 10% penalty.

On February 6, 2006, the President submitted his proposed federal budget for fiscal year 2007 to the Congress. In it, he called for the consolidation and simplification of various types of IRAs into two new accounts, the Lifetime Savings Account (LSA) and the Retirement Savings Account (RSA). Participation in these accounts would be much less restrictive than current-law IRAs. For instance, an individual would be able to make an annual $5,000 nondeductible LSA contribution and a maximum yearly contribution of $5,000 (or employment earnings if less) to an RSA. Both of these contributions would not be limited by age or income.

Qualified distributions make from an LSA would not be included in income for tax purposes. RSA distributions would be excluded from taxable income after the holder reaches age 58. If (s)he dies or becomes disabled, distributions from RSAs would not be taxed. All other RSA distributions would be considered taxable events. RSAs are designed to replace both existing Roth and traditional IRAs. LSAs would replace Coverdell Education Savings Accounts (ESAs) and Archer Medical Savings Accounts (MSAs).

On August 17, 2006, the Pension Protection Act of 2006 (H.R. 4) was signed into law by President Bush. The new law contains a number of provisions that CUNA has long promoted. First, the Act makes permanent the increased contribution limits and "catch-up" provisions for Individual Retirement Accounts (IRAs). The higher caps and "catch-up" provisions were enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)(P.L. 107-16). Because of Senate budgetary rules, these provisions would have expired at the end of 2010. Had these provisions not been extended before the end of the decade, the maximum tax-deductible IRA contribution would have reverted to $2,000 annually (from the 2008 phased-in amount of $5,000) and the "catch-up" provisions that provided for increased contributions ($1,000 annually) by those age 50 and older would have expired.

A provision to assist our military personnel called to active duty was also included in H.R. 4. It allows distributions to be made penalty-free from IRAs held by members of the National Guard and Reserves called to active duty through 2007. Amounts withdrawn may be repaid to their IRAs within two years.

This new law will also index the income limits for traditional, spousal and Roth IRAs to prevent these tax benefits from being diminished over the years by inflation. It will also allow taxpayers to directly deposit their tax refunds into their IRAs. In addition, the bill will permit (until 2007) tax-free distributions from IRAs for charitable purposes. The distribution must be paid directly to the charity by an IRA holder age 70½ or older. Finally, the bill allows direct rollovers from certain qualified retirement plans to Roth IRAs.

H.R. 4 also included a provision long sought after by CUNA and promoted in the previously-mentioned letter to the House/Senate conference committee negotiating the final details of the pension bill. This provision would make permanent the Retirement Savings Tax Credit, also known as the Saver's Credit. The 2001 Tax Act created this credit and it was scheduled to expire at the end of this year. The Savers Credit was designed to encourage retirement savings among lower and middle-income individuals. It allows eligible tax filers to take a tax credit on up to 50% of the first $2,000 of contributions annually to an IRA or other qualified retirement plan they may have. The new law will also index the Saver’s Credit income limits that determine eligibility.

The Saver’s Credit benefits lower and middle-income individuals and families to both save for their retirement as well as lower their tax liability. It also increases the assets held in credit unions.

CONTACTS: John Hildreth, (202) 508-6724, jhildreth@cuna.coop.

Related Documents:

June 21, 2006: Letter to Pension Reform Conferees Regarding Details of Final Conference Report

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