Senate retirement bill includes tax break for financial planning

While the provision helps level the playing field, prominent industry observers, like Michael Kitces, worry the benefit is too narrow. Investment Adviser Association, and other groups, are pushing for a broader tax deduction.

Recently introduced Senate retirement-savings legislation would provide a tax break for investment advice, but some advisers are seeking a broader tax benefit.

The provision, contained in section 112 of the Retirement Security and Savings Act, would permit employees to use pre-tax dollars through employer-based retirement programs to pay for investment-advice-related retirement planning.

The bill, which was introduced in late May by Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md., contains dozens of provisions to expand access to workplace retirement plans, allow people to set aside more money for retirement and increase the age for required minimum distributions from retirement accounts from 72 to 75.

The Senate measure — and a related House bill written by Reps. Richard Neal, D-Mass. and chairman of the House Ways and Means Committee, and Kevin Brady, R-Texas and ranking member of the panel — build on the SECURE Act that Congress approved in late 2019.

The investment-advice provision, which is similar to one included in a previous iteration of the Portman-Cardin bill, is only contained in the Senate measure.

The idea behind the tax break is for employers to help employees do retirement planning, a Portman aide said. The lawmaker wants to level the playing field between commissions, which are tax deductible, and other kinds of investment-advice fees that are not.

“We want to make sure people are getting investment advice and that the tax advantage is available for various types of advice that people can receive,” said Emmalee Cioffi, a spokesperson for Portman.

The tax break applies to investment advice from a third party. Any employee can seek such advice regardless of whether they’re in the company’s retirement plan or if the advice relates to funds held inside or outside of a qualified plan.

Michael Kitces, head of planning at Buckingham Wealth Partners, said he’s always happy to see tax incentives for financial planning. But he’s concerned that the tax break in the Senate bill is too narrow.

He said it only benefits employees, leaving out the unemployed, self-employed and retirees who cannot route the tax break through a company payroll system. In addition, investors who hire advisers directly probably wouldn’t qualify for the tax break because their advice fees are billed directly from their portfolios and not through their employer’s payroll system.

“It’s a startling lack of parity,” said Kitces, co-founder of the XY Planning Network and publisher of the Nerd’s Eye View blog. “Why isn’t it being applied uniformly?”

BROADER TAX BREAKS

A broader tax benefit for investment advice was killed by the 2017 tax reform law, which eliminated the tax break for advice fees that exceed 2% of a taxpayer’s gross adjusted income.

The Investment Adviser Association, the National Association of Personal Financial Advisors, the Financial Planning Association, the Certified Financial Planner Board of Standards Inc. and the Financial Services Institute have been working for more than a year to restore and expand the tax deduction for investment advice.

Neil Simon, IAA vice president for government relations, is encouraged by the Portman-Cardin provision.

“Anything that can be done in the tax code to help individuals save and [access] professional fiduciary advice is something IAA strongly supports,” Simon said. “We feel that all taxpayers should be able to gain the benefit of advice and more favorable tax treatment.”

But the lobbying effort on the broader advice tax deduction has been a challenge.

“There hasn’t been a lot of appetite on Capitol Hill to reopen the 2017 tax bill,” Simon said. “It’s not one of the top-of-mind, urgent tax issues. We’re gaining ground, but it seems unlikely action is imminent. Advisers have to keep on working this issue.”

The Portman-Cardin bill could come up for a hearing this summer and vote in the fall in the Senate Finance Committee, on which both lawmakers serve, a Portman aide said. The House bill was approved by the Ways and Means Committee in May.