Children's Financial Security Act of 1996

Summary: Children's Financial Security Act of 1996 - 
Directs the Secretary of the Treasury or a delegate to transfer each calendar year, from the general fund of the Treasury and for each calendar year, $1,000 to the Child Retirement Account (CRA) of each eligible child.  Makes eligible any individual who as of the close of such calendar year:  (1) is a citizen or resident alien of the United States; and (2) has not attained age six.  Allows the applicable taxpayer, in the case of children below age 19 as of the close of 1996, to contribute, during 1997 and 1998 only, to the child's CRA an amount equal to the lesser of $6,000 or the product of $1,000 and the child's age as of the close of 1996.  Reduces the amount of any Federal or parental contribution for children of high-income parents, according to a phaseout range formula. 
Amends the Internal Revenue Code to exempt CRAs from the income tax, but not from the tax on unrelated business income of charitable organizations.  Requires the withholding of a 20 percent tax on any distribution from a CRA (although such distributions shall not be included in gross income).  Provides for qualified special purpose distributions for first-time homebuying and for higher education expenses (along with a specified credit against the 20 percent distribution tax).

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Children's Financial Security Act of 
1996''.

SEC. 2. FEDERAL CONTRIBUTIONS TO CHILD RETIREMENT ACCOUNTS.

    (a) In General.--As soon as practicable after the close of each 
calendar year, the Secretary of the Treasury or his delegate shall 
transfer for such calendar year, from amounts in the general fund of 
the Treasury not otherwise appropriated, $1,000 to the Child Retirement 
Account of each individual who is an eligible child for such calendar 
year.
    (b) Eligible Child.--For purposes of this section, the term 
``eligible child'' means, with respect to any calendar year, any 
individual who, as of the close of such calendar year--
            (1) is a citizen or resident alien of the United States, 
        and
            (2) has not attained age 6.
    (c) Reduction in Contribution for Children of High Income 
Parents.--
            (1) In general.--If, with respect to an eligible child, the 
        adjusted gross income of the applicable taxpayer for the 
        taxable year ending with or within a calendar year exceeds the 
        threshold amount, the $1,000 amount in subsection (a) with 
        respect to such child for such calendar year shall be reduced 
        (but not below zero) by the amount which bears the same ratio 
        to $1,000 as such excess bears to the phaseout range.
            (2) Applicable taxpayer may make-up reduced contribution.--
        If there is a reduction under this subsection in the amount 
        transferred under subsection (a) to the Child Retirement 
        Account of an eligible child for any calendar year, the 
        applicable taxpayer with respect to such child may (at such 
        time and in such manner as the Secretary may prescribe) 
        transfer an amount equal to the amount of such reduction to the 
        Child Retirement Account of such child.
    (d) Children Below Age 19 as of Enactment.--
            (1) In general.--In the case of an individual who, as of 
        the close of 1996--
                    (A) is a citizen or resident alien of the United 
                States, and
                    (B) has not attained age 19,
        the applicable taxpayer with respect to such individual may (at 
        such time and in such manner as the Secretary may prescribe) 
        contribute to the Child Retirement Account of such child an 
        amount equal to the lesser of $6,000 or the product of $1,000 
        and the age of such child as of the close of 1996. Any 
        contribution under the preceding sentence may be made only 
        during 1997 and 1998.
            (2) Reduction of contribution for children of high income 
        parents.--If, with respect to an individual described in 
        paragraph (1), the adjusted gross income of the applicable 
        taxpayer for the taxable year ending with or within 1997 
        exceeds the threshold amount, the amount otherwise determined 
        under paragraph (1) with respect to such individual shall be 
        reduced (but not below zero) by the amount which bears the same 
        ratio to the amount so otherwise determined as such excess 
        bears to the phaseout range.
    (e) Definitions.--For purposes of subsections (c) and (d)--
            (1) Phaseout range.--The term ``phaseout range'' means--
                    (A) $50,000 in the case of a joint return,
                    (B) $33,000 in the case of an individual who is not 
                married, and
                    (C) $25,000 in the case of a married individual 
                filing a separate return.
            (2) Threshold amount.--The term ``threshold amount'' 
        means--
                    (A) $100,000 in the case of a joint return for such 
                taxable year,
                    (B) $67,000 in the case of an individual who is not 
                married, and
                    (C) $50,000 in the case of a married individual 
                filing a separate return.
            (3) Applicable taxpayer.--The term ``applicable taxpayer'' 
        means, with respect to an eligible child--
                    (A) the taxpayer to whom a deduction is allowable 
                under section 151(c) of the Internal Revenue Code of 
                1986 for such child, or
                    (B) if no taxpayer is described in subparagraph 
                (A), such child.

SEC. 3. CHILD RETIREMENT ACCOUNTS.

    (a) In General.--Subchapter F of chapter 1 of the Internal Revenue 
Code of 1986 (relating to exempt organizations) is amended by adding at 
the end the following new part:

                 ``PART VIII--CHILD RETIREMENT ACCOUNTS

                              ``Sec. 529. Child Retirement Accounts.

``SEC. 529. CHILD RETIREMENT ACCOUNTS.

    ``(a) Child Retirement Account.--For purposes of this part, the 
term `Child Retirement Account' means any trust created or organized in 
the United States for the exclusive benefit of the account beneficiary 
but only if the written governing instrument creating the trust meets 
the following requirements:
            ``(1) No contribution will be accepted unless it is in 
        cash.
            ``(2) The only contributions which will be accepted are--
                    ``(A) contributions under section 2 of the 
                Children's Financial Security Act of 1996,
                    ``(B) contributions of not more than $100 for each 
                calendar year after the calendar year in which the 
                account beneficiary attains age 5 and before the 
                calendar year in which such beneficiary attains age 19, 
                and
                    ``(C) trustee-to-trustee transfers to such trust 
                from another Child Retirement Account of the account 
                beneficiary.
            ``(3) The assets of the trust are invested only in an 
        approved mutual fund.
            ``(4) The requirements of paragraphs (2) through (6) of 
        section 408(a) are met.
    ``(b) Tax Treatment of Accounts.--
            ``(1) In general.--A Child Retirement Account is exempt 
        from taxation under this subtitle unless such account has 
        ceased to be a Child Retirement Account. Notwithstanding the 
        preceding sentence, any such Account is subject to the taxes 
        imposed by section 511 (relating to imposition of tax on 
        unrelated business income of charitable, etc., organizations).
            ``(2) Account terminations.--Rules similar to the rules of 
        paragraphs (2) and (4) of section 408(e) shall apply to Child 
        Retirement Accounts; except that such paragraph (4) shall not 
        apply to loans which are qualified special purpose 
        distributions.
    ``(c) Tax Treatment of Distributions.--
            ``(1) In general.--
                    ``(A) Withholding.--The trustee of a Child 
                Retirement Account shall deduct and withhold from any 
                distribution from such Account a tax equal to 20 
                percent of such distribution.
                    ``(B) No other tax.--Distributions from a Child 
                Retirement Account shall not be includible in gross 
                income.
                    ``(C) Credit for amounts withheld only on qualified 
                special purpose loan distributions which are repaid.--
                In the case of an amount withheld under subparagraph 
                (A) on a qualified special purpose distribution from a 
                Child Retirement Account in the form of a loan, there 
                shall be allowed as a credit against the tax imposed by 
                this subtitle for any taxable year an amount which 
                bears the same ratio to the amount withheld as the 
                principal amount of such loan which is repaid during 
                such taxable year bears to the total principal amount 
                of the loan. The credit allowed under the preceding 
                sentence shall be treated as a credit allowed under 
                subpart C of part IV of subchapter A of this chapter 
                and shall be allowed to the account beneficiary.
            ``(2) Penalty on distributions not used for qualified 
        purposes.--If any distribution is made from a Child Retirement 
        Account which is not a qualified distribution, the account 
        beneficiary's tax imposed by this chapter for the taxable year 
        in which such distribution is made shall be increased by an 
        amount equal to 50 percent of such distribution.
            ``(3) Qualified distribution.--For purposes of paragraph 
        (2), the term `qualified distribution' means any distribution--
                    ``(A) made on or after the date on which the 
                account beneficiary attains age 59\1/2\,
                    ``(B) made to a beneficiary (or to the estate of 
                the individual) on or after the death of the account 
                beneficiary,
                    ``(C) attributable to the account beneficiary being 
                disabled (within the meaning of section 72(m)(7)), or
                    ``(D) which is a qualified special purpose 
                distribution.
            ``(4) Qualified special purpose distribution.--For purposes 
        of paragraph (3), the term `qualified special purpose 
        distribution' means any distribution (including in the form of 
        a loan) from a Child Retirement Account to the account 
        beneficiary--
                    ``(A) if such distribution is a qualified first-
                time homebuyer distribution, or
                    ``(B) to the extent the aggregate distributions 
                from the Account does not exceed the qualified higher 
                education expenses of the account beneficiary for the 
                taxable year in which received.
        Such term shall not include any distribution from such an 
        Account during a calendar year to the extent such distribution, 
        when added to the amount of all prior distributions from such 
        Account during the calendar year and all prior calendar years, 
        exceeds an amount equal to 50 percent of the balance in such 
        Account as of the close of the prior calendar year.
            ``(5) Qualified first-time homebuyer distributions.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `qualified first-time homebuyer distribution' 
                means any payment or distribution received by the 
                account beneficiary to the extent such payment or 
                distribution is used by such beneficiary within a 
                reasonable period to pay qualified acquisition costs 
                with respect to a principal residence for such 
                beneficiary as a first-time homebuyer.
                    ``(B) Qualified acquisition costs.--For purposes of 
                this paragraph, the term `qualified acquisition costs' 
                means the costs of acquiring, constructing, or 
                reconstructing a residence. Such term includes any 
                usual or reasonable settlement, financing, or other 
                closing costs.
                    ``(C) First-time homebuyer; other definitions.--For 
                purposes of this paragraph--
                            ``(i) First-time homebuyer.--The term 
                        `first-time homebuyer' means any individual if 
                        such individual (and, if married, such 
                        individual's spouse) had no present ownership 
                        interest in a principal residence during the 3-
                        year period ending on the date of acquisition 
                        of the principal residence to which this 
                        paragraph applies.
                            ``(ii) Principal residence.--The term 
                        `principal residence' has the same meaning as 
                        when used in section 1034.
                            ``(iii) Date of acquisition.--The term 
                        `date of acquisition' means the date--
                                    ``(I) on which a binding contract 
                                to acquire the principal residence to 
                                which subparagraph (A) applies is 
                                entered into, or
                                    ``(II) on which a binding contract 
                                to construct or reconstruct such a 
                                principal residence is entered into.
            ``(6) Qualified higher education expenses.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means--
                            ``(i) expenses for tuition, fees, books, 
                        supplies, and equipment required for the 
                        enrollment or attendance of the account 
                        beneficiary at an eligible educational 
                        institution (as defined in section 135(c)(3)), 
                        and
                            ``(ii) reasonable living expenses while 
                        away from home while attending such 
                        institution.
                    ``(B) Coordination with savings bond provisions.--
                The amount of qualified higher education expenses for 
                any taxable year shall be reduced by any amount 
                excludable from gross income under section 135.
            ``(7) Exceptions from withholding tax and penalty for 
        trustee-to-trustee transfers.--Paragraphs (1)(A) and (2) shall 
        not apply to any trustee-to-trustee transfers from a Child 
        Retirement Account to another Child Retirement Account of the 
        same account beneficiary.
    ``(d) Approved Mutual Fund.--For purposes of this section--
            ``(1) In general.--The term `approved mutual fund' means 
        any fund of any regulated investment company (as defined in 
        section 851(a)) if--
                    ``(A) an election under section 851(b)(1) is in 
                effect with respect to such company, and
                    ``(B) such fund is designated by the Federal 
                Retirement Thrift Investment Board for purposes of this 
                section.
            ``(2) Standards for designation.--A fund may be designated 
        under paragraph (1) only if the Federal Retirement Thrift 
        Investment Board determines that it is reasonable to expect 
        that not less than 75 percent of the total value of the assets 
        of such fund are represented by equity securities.
    ``(e) Certain Rules To Apply.--Rules similar to the following rules 
shall apply for purposes of this section:
            ``(1) Section 219(f)(3) (relating to time when 
        contributions deemed made).
            ``(2) Section 408(g) (relating to community property laws).
            ``(3) Section 408(h) (relating to custodial accounts).
    ``(f) Reports.--The Secretary may require the trustee of a Child 
Retirement Account to make such reports regarding such Account to the 
Secretary and to the account beneficiary with respect to contributions, 
distributions, and such other matters as the Secretary determines 
appropriate. The reports required by this subsection shall be filed at 
such time and in such manner and furnished to such individuals at such 
time and in such manner as may be required by the Secretary.''
    (b) Conforming Amendments.--
            (1) Tax on prohibited transactions.--
                    (A) Section 4975 of such Code (relating to tax on 
                prohibited transactions) is amended by adding at the 
                end of subsection (c) the following new paragraph:
            ``(5) Special rule for child retirement accounts.--An 
        individual for whose benefit a Child Retirement Account (within 
        the meaning of section 529(a)) is established shall be exempt 
        from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be a Child Retirement 
        Account by reason of the application of section 529(b)(2) to 
        such Account.''
                    (B) Paragraph (1) of section 4975(e) of such Code 
                is amended by striking ``or'' at the end of 
                subparagraph (D), by redesignating subparagraph (E) as 
                subparagraph (F), and by inserting after subparagraph 
                (D) the following new subparagraph:
                    ``(E) a Child Retirement Account described in 
                section 529(a), or''.
            (2) Failure to provide reports on child retirement 
        accounts.--Paragraph (2) of section 6693(a) of such Code is 
        amended by striking ``and'' at the end of subparagraph (A), by 
        striking the period at the end of subparagraph (B) and 
        inserting ``, and'', and by adding at the end the following new 
        subparagraph:
                    ``(C) section 529(f) (relating to Child Retirement 
                Accounts).''
            (3) Clerical amendment.--The table of parts for subchapter 
        F of chapter 1 of such Code is amended by adding at the end the 
        following new item:

                              ``Part VIII. Child Retirement Accounts.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1996.