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Transportation bills affect ER?
Old 02-12-2012, 01:17 PM   #1
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Transportation bills affect ER?

This long post is primarily a news item, but I post some opinions down at the bottom.

Whats' up:

Following the progress of federal highway transportation bills isn't usually relevant to retirement planning, but this isn't a typical year for Congress. With self-imposed requirements to offset projected growth in general fund spending, the House and the Senate are having to use their imagination to find funding sources for all kinds of expenditures.

In today's example, finding offsets associated with authorizing transportation spending for the next few years has resulted in two current proposals that might affect members.

One would change federal employee pension and TSP rules, the other would change the tax treatment for inherited IRA's.

Nothing has passed both chambers yet.


The Highway Trust Fund is funded by the federal gas tax, which currently brings in about $36 billion a year from an 18.4 cents per gallon taxation rate. The trust funds are in turn used for spending on federal highway and transit programs, which are allocated to the states by various categories and formulas.

In large part because the gas tax has been fixed at 18.4 cents per gallon for many years, revenues have failed to keep up with inflation. In addition, improvements in vehicle fuel efficiency have negatively affected the revenues generated. The result for the last several years has been Congress supplementing trust fund revenue with general fund revenue in order to pass their authorization and appropriations bills related to transportation.

The House:

Most mainstream news reports have highlighted the House Republicans desire to find additional revenue for the transportation bill through tax policies related to energy production (and the side issue of forcing the administration to approve the tar sands pipeline from Canada to Texas.). Stories aimed at industry folks have focused on the spending side, where the House proposes to drastically reduce federal transit spending in favor of highway spending.

But there's more...

House Republicans: Cut feds' retirement benefits to pay for transportation -

CBO: Pension bill would save government billions - Pay & Benefits -
"H.R. 3813, which the Republican leadership incorporated into the massive transportation bill heading to the floor next week, would require federal workers and members of Congress to contribute a total of 1.5 percent extra over three years beginning in 2013 to their defined retirement benefits. It also would eliminate the FERS annuity supplement, allow retiring feds to deposit lump sums from their unused annual leave into their Thrift Savings Plan accounts to boost their savings, and subject new hires to a high-five average salary calculation for annuities rather than the current high-three average pay calculation...."
The House hasn't passed their bill yet.

The Senate:

The Senate voted Thursday to end debate on its Moving Ahead for Progress in the 21st Century bill (S. 1813), clearing the way on a final vote on the measure that could come as early as next week.

The Senate's transportation bill is silent on the federal pension matters included in the House bill. Earlier in the week, however, the Senate Finance Committee's part of the bill had provisions that would have affected future distributions on inherited IRA's.

As best I can tell, this is a chronological account of what happened this week.

Monday's version of the financing bill included IRA changes.
Senate Highway Bill Would Tap Into Individual’s Retirement Money - Washington Wire - WSJ
"Under current law, owners of IRAs can stretch the life – and increase the value – of tax-deferred IRAs by passing them along to children or grandchildren at death. That’s because required annual minimum distributions typically are calculated using life expectancy tables; younger people get smaller payouts, so when they inherit an IRA, the money lasts longer and typically grows more.

The Senate Finance bill would require taxes to be paid on the account as if it were fully distributed within five years of the account holder’s death. There would be hardship exceptions for certain beneficiaries, including special-needs children. The proposal would raise about $4.6 billion over the next decade..."
The details are here, starting on page 12:

The Senators on the Finance Committee then debated the dozen or so revenue-producing measures that added up to the target number. These articles describe the final bill, which eliminated the IRA changes:
Senate Panel OKs Transportation Funding, But IRA Tax Provision Will Not Survive - Southeastern Council of Foundations

Committee finds $9.6 billion for $109B Senate transportation bill - The Hill's Transportation Report

My Thoughts:

The House provisions on federal pension changes don't affect me directly so I must admit I haven't read them closely. In general, it appears the proposal covers the usual options available for reforming public sector pensions. The impacts being spread onto current employees will be the most controversial and difficult to pass. Changes affecting future federal employees will be easier.

On the other hand, if I was a current federal employee I would be excited about the option to roll some cash into TSP in lieu of taking vacation time. In a previous local government job, I was able to "cash out" excess vacation time to a 401(a) account. It was a nice perk.

If (when?) the Senate bill's proposed changes to IRA's reappear in some future bill, it will of course have a much wider effect. I personally benefit from the extended withdrawal schedule applicable to an IRA I inherited from one of my parents. A change would affect my planning for any IRA funds I may inherit from my other parent, however. (My parents divorced long ago. Spouse IRA inheritance rules didn't apply.)

Seems to me the current "life of the beneficiary" RMD method for inherited IRA's is pretty sweet, and is likely to get whacked some in the coming months. However, taking it to a required 5-year schedule for tax purposes seems to be a bit of a reach. I'd be OK with a middle ground where the beneficiary's RMD's and taxes were correlated to the IRA owner's projected life span and his RMD's at the time of death. In other words, for a 45-year-old with a parent who dies at 65 with another twenty years of "expected" life span, the RMD's on the inherited IRA would be spread out over 20 years (85-65), not 5 years or 40 years (85-45).
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