T17-0197 - Guaranteed Retirement Account with $600 Credit (Present-Value Approach), Baseline: Current Law, Distribution of Federal Tax Change by Expanded Cash Income Level, 2018
Distribution of tax burden change from a proposal to establish guaranteed retirement accounts with $600 credit against current law baseline by expanded cash income level, calendar year 2018. The proposal would repeal Retirement Savings Contributions Credit, exclusion from income tax of elective contributions to employees' defined contribution plans, and income tax deduction based on contributions to self-employed defined contribution plans and Individual Retirement Accounts (IRAs). The proposal would mandate contributions to a Guaranteed Retirement Account (GRA) for any employee or self-employed without a defined benefit pension plan. The mandate would require earners to contribute 1.5% of their combined earnings and self-employment income up to $3,750. In addition, their employers must contribute 1.5% of employees' earnings up to $3,750 when earnings are at least $20,000; otherwise, the required employer contribution would be the smaller between 2% of earnings and $300. Individuals with self-employment income must make contributions on their own behalf in lieu of employers under the same rule. All GRA employer contributions would be exempt from income and payroll tax. Participants would be eligible for a refundable tax credit which is the smaller between the credit limit and their GRA employee contributions. The GRA employee contributions not qualified for the tax credit would be deductible for income tax purpose. The proposal would allow individuals and their employers to contribute more than the GRA contribution limits, but the combined GRA and non-GRA contributions must not exceed relevant (defined contributions pension or IRA) contribution limits. GRA employer contributions for employees would be exempt from income and payroll tax, but only exempt from only income tax for self-employed. Investment returns from all GRA contributions and non-GRA employer contributions would be exempt from income tax but withdrawals of principals and accumulated earnings would be taxable. In contrast, non-GRA elective contributions would be taxable and treated as tax-deferred contributions, i.e. investment returns accumulated tax-free but taxable upon withdrawals while withdrawals of principals would be tax exempt. Retirement savings made prior to the proposal's effective date would be governed by the current law. The proposal would be effective for new contributions beginning on 1/1/2018. The credit amount under this proposal would be $600. The tax parameters stated above are in 2016 dollars and would be indexed by CPI-U.