Help retirement plan participants understand tax reform

On November 2, a proposed tax bill, the Tax Cuts and Jobs Act, was revealed by the House Republicans that would make sweeping changes to both business and individual tax rules.

Retirement tax incentives, such as the pre-tax deferral treatment of contributions into 401(k) and other defined contribution plans, did not see changes under the proposed bill.

However, there are key provisions that would significantly impact businesses and taxpayers. If passed, these provisions would take effect January 1, 2018. Remember, these are simply proposed changes. There are many steps to the process.

Changes for retirement savers

Under the draft bill, IRA holders won’t be able to switch traditional IRA contributions to Roth contributions, or vice versa, as allowed now with IRA’s only (switching back and forth is not allowed under retirement plans like a 401(k)). The ability to reverse traditional IRA-to-Roth-IRA conversions would also be eliminated.

In addition, the bill would change some requirements around 401(k) plan loans, hardship withdrawals, and in-service distributions. Here are some impacts.

  • The bill extends the repayment deadline for participants with an outstanding loan when they leave the plan. 
  • It eliminates any requirement for participants to take a loan before they’re eligible to take a hardship withdrawal.
  • It discontinues the six-month suspension of 401(k) deferrals following a hardship withdrawal.
  • It allows in-service distributions sooner for defined benefit governmental plans, at age 59.5.

The proposed bill also impacts nonqualified deferred compensation plans.

Changes for businesses

The proposal calls for a change in the corporate tax rate from 35% to 20%. It also would change the business income tax rate and how income from foreign countries would be taxed.

Other highlights in the Tax Cuts and Jobs Act

The bill includes a number of other changes that could impact you and your retirement plan participants. Here are some highlights.

  • Fewer tax brackets
  • Increased standard deduction
  • Changes to state and local tax deductions
  • Expanded child tax credit
  • Elimination of the estate tax and Alternative Minimum Tax (AMT)

What’s next?

Now that the House bill has been released, the tax writing committee (Ways & Means) will present an opportunity for the bill to be changed and voted on before going to the House. At the same time, the Senate Finance Committee is expected to launch their own process. The bill must pass both chambers before both groups come together to pass final legislation with revisions.

What does it mean for you?

Tax reform is complicated. This is just a snapshot of the proposed changes. To fully understand the implications, it’s important to find trusted resources to help you sort through the potential impacts.

Steps you can take:

  • Share this article if your defined contribution plan participants have questions.
  • Visit the Tax Foundation or the Tax Policy Center to get more of a full picture.
  • Contact your financial or tax professional and ask about the potential impacts on your company or personal situation. 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.