Pay for Baby or Save for Retirement? Tax 2.0’s Plan for Families

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By Genevieve Douglas

Tapping into retirement savings as a means of paying for new baby expenses is emerging again, likely leading to continued debates over whether the option will help people avoid debt or drain their accounts.

A “New Baby Savings” option was included in the brief outline of “Tax 2.0,” released July 24 by House Ways and Means Committee Chairman Kevin Brady (R-Texas). It would allow families to access their own retirement accounts penalty-free for expenses when welcoming a new child into the family, whether by birth or adoption, and allow those families to replenish retirement savings accounts in the future. The short proposal didn’t detail what kinds of expenses would be included.

“This is designed to address the fact that sometimes people are in a bind and they have to take their money,” Lynn Dudley, senior vice president of global retirement and compensation policy for the American Benefits Council, told Bloomberg Law July 25. How the new baby option is structured—such as through a Roth account or pre-tax savings— and whether it “creates additional leakage from retirement savings” will likely be points of contention among lawmakers in both chambers, she said.

But the option to withdraw cash when starting a family could be a draw to encourage greater participation in retirement plans if the money can be accessed under certain circumstances, Andrew Biggs, resident scholar at the American Enterprise Institute on public and private sector compensation and Social Security reform, told Bloomberg Law in an email July 25. “It’s not obvious that allowing these withdrawals will reduce retirement savings, but still I think we want to be careful about them,” Biggs said.

The new baby savings plan aligns with multiple Republican-backed ideas for supporting new parents using existing retirement benefits vehicles, such as Social Security.

Sen. Joni Ernst (R-Iowa) introduced a plan for federal paid family leave during a Senate Finance Subcommittee hearing July 11 that would use Social Security contribution deductions to pay for maternity and paternity leaves. Rep. Mimi Walters ’ (R-Calif.) bill for paid leave—Workflex in the 21st Century Act (H.R. 4219)—would amend the Employee Retirement Income Security Act to establish a voluntary paid leave program and workflex option under which employers that participate would be exempt from certain state and local laws regarding leave and employee benefits.

“I am glad that more members of Congress are taking a look at how we can support our new families, and I am looking forward to seeing additional details regarding the proposal,” Ernst said in a comment provided to Bloomberg Law July 25.

The Tax 2.0 framework has already drawn criticism from Democrats, however. “Republicans’ first tax bill exposed the party’s real priorities: big corporations and people at the top. Wages aren’t rising, workers are getting laid off, and average families aren’t feeling any relief,” Ways and Means Committee Ranking Member Richard Neal (D-Mass.) said in a statement.

Brady’s framework for future tax legislation goals also includes items for small business tax cuts, additional family-friendly savings plans, and tax breaks for entrepreneurs’ start-up costs. Brady said in an interview that he expects a vote on the House floor in September.

The House Ways and Means press office didn’t respond to requests for comment on the new baby savings proposal.

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