I

104TH CONGRESS

2D SESSION H. R. 4253

To enhance the financial security of children by providing for contributions

by the Federal Government to Child Retirement Accounts.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 27, 1996

Mr. HOUGHTON (for himself and Mrs. KENNELLY) introduced the following

bill; which was referred to the Committee on Ways and Means

A BILL

To enhance the financial security of children by providing

for contributions by the Federal Government to Child

Retirement Accounts.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Children’s Financial

5 Security Act of 1996’’.
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1 SEC. 2. FEDERAL CONTRIBUTIONS TO CHILD RETIREMENT

2 ACCOUNTS.

3 (a) IN GENERAL.—As soon as practicable after the

4 close of each calendar year, the Secretary of the Treasury

5 or his delegate shall transfer for such calendar year, from

6 amounts in the general fund of the Treasury not otherwise

7 appropriated, $1,000 to the Child Retirement Account of

8 each individual who is an eligible child for such calendar

9 year.

10 (b) ELIGIBLE CHILD.—For purposes of this section,

11 the term ‘‘eligible child’’ means, with respect to any cal12 endar year, any individual who, as of the close of such

13 calendar year—

14 (1) is a citizen or resident alien of the United

15 States, and

16 (2) has not attained age 6.

17 (c) REDUCTION IN CONTRIBUTION FOR CHILDREN

18 OF HIGH INCOME PARENTS.—

19 (1) IN GENERAL.—If, with respect to an eligible

20 child, the adjusted gross income of the applicable

21 taxpayer for the taxable year ending with or within

22 a calendar year exceeds the threshold amount, the

23 $1,000 amount in subsection (a) with respect to

24 such child for such calendar year shall be reduced

25 (but not below zero) by the amount which bears the
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1 same ratio to $1,000 as such excess bears to the

2 phaseout range.

3 (2) APPLICABLE TAXPAYER MAY MAKE-UP RE4 DUCED CONTRIBUTION.—If there is a reduction

5 under this subsection in the amount transferred

6 under subsection (a) to the Child Retirement Ac7 count of an eligible child for any calendar year, the

8 applicable taxpayer with respect to such child may

9 (at such time and in such manner as the Secretary

10 may prescribe) transfer an amount equal to the

11 amount of such reduction to the Child Retirement

12 Account of such child.

13 (d) CHILDREN BELOW AGE 19 AS OF ENACTMENT.—

14 (1) IN GENERAL.—In the case of an individual

15 who, as of the close of 1996—

16 (A) is a citizen or resident alien of the

17 United States, and

18 (B) has not attained age 19,

19 the applicable taxpayer with respect to such individ20 ual may (at such time and in such manner as the

21 Secretary may prescribe) contribute to the Child Re22 tirement Account of such child an amount equal to

23 the lesser of $6,000 or the product of $1,000 and

24 the age of such child as of the close of 1996. Any
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1 contribution under the preceding sentence may be

2 made only during 1997 and 1998.

3 (2) REDUCTION OF CONTRIBUTION FOR CHIL4 DREN OF HIGH INCOME PARENTS.—If, with respect

5 to an individual described in paragraph (1), the ad6 justed gross income of the applicable taxpayer for

7 the taxable year ending with or within 1997 exceeds

8 the threshold amount, the amount otherwise deter9 mined under paragraph (1) with respect to such in10 dividual shall be reduced (but not below zero) by the

11 amount which bears the same ratio to the amount

12 so otherwise determined as such excess bears to the

13 phaseout range.

14 (e) DEFINITIONS.—For purposes of subsections (c)

15 and (d)—

16 (1) PHASEOUT RANGE.—The term ‘‘phaseout

17 range’’ means—

18 (A) $50,000 in the case of a joint return,

19 (B) $33,000 in the case of an individual

20 who is not married, and

21 (C) $25,000 in the case of a married indi22 vidual filing a separate return.

23 (2) THRESHOLD AMOUNT.—The term ‘‘thresh24 old amount’’ means—
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1 (A) $100,000 in the case of a joint return

2 for such taxable year,

3 (B) $67,000 in the case of an individual

4 who is not married, and

5 (C) $50,000 in the case of a married indi6 vidual filing a separate return.

7 (3) APPLICABLE TAXPAYER.—The term ‘‘appli8 cable taxpayer’’ means, with respect to an eligible

9 child—

10 (A) the taxpayer to whom a deduction is

11 allowable under section 151(c) of the Internal

12 Revenue Code of 1986 for such child, or

13 (B) if no taxpayer is described in subpara14 graph (A), such child.

15 SEC. 3. CHILD RETIREMENT ACCOUNTS.

16 (a) IN GENERAL.—Subchapter F of chapter 1 of the

17 Internal Revenue Code of 1986 (relating to exempt organi18 zations) is amended by adding at the end the following

19 new part:

20 ‘‘PART VIII—CHILD RETIREMENT

21 ACCOUNTS

‘‘Sec. 529. Child Retirement Accounts.

22 ‘‘SEC. 529. CHILD RETIREMENT ACCOUNTS.

23 ‘‘(a) CHILD RETIREMENT ACCOUNT.—For purposes

24 of this part, the term ‘Child Retirement Account’ means
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1 any trust created or organized in the United States for

2 the exclusive benefit of the account beneficiary but only

3 if the written governing instrument creating the trust

4 meets the following requirements:

5 ‘‘(1) No contribution will be accepted unless it

6 is in cash.

7 ‘‘(2) The only contributions which will be ac8 cepted are—

9 ‘‘(A) contributions under section 2 of the

10 Children’s Financial Security Act of 1996,

11 ‘‘(B) contributions of not more than $100

12 for each calendar year after the calendar year

13 in which the account beneficiary attains age 5

14 and before the calendar year in which such ben15 eficiary attains age 19, and

16 ‘‘(C) trustee-to-trustee transfers to such

17 trust from another Child Retirement Account of

18 the account beneficiary.

19 ‘‘(3) The assets of the trust are invested only

20 in an approved mutual fund.

21 ‘‘(4) The requirements of paragraphs (2)

22 through (6) of section 408(a) are met.

23 ‘‘(b) TAX TREATMENT OF ACCOUNTS.—

24 ‘‘(1) IN GENERAL.—A Child Retirement Ac25 count is exempt from taxation under this subtitle
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1 unless such account has ceased to be a Child Retire2 ment Account. Notwithstanding the preceding sen3 tence, any such Account is subject to the taxes im4 posed by section 511 (relating to imposition of tax

5 on unrelated business income of charitable, etc., or6 ganizations).

7 ‘‘(2) ACCOUNT TERMINATIONS.—Rules similar

8 to the rules of paragraphs (2) and (4) of section

9 408(e) shall apply to Child Retirement Accounts; ex10 cept that such paragraph (4) shall not apply to loans

11 which are qualified special purpose distributions.

12 ‘‘(c) TAX TREATMENT OF DISTRIBUTIONS.—

13 ‘‘(1) IN GENERAL.—

14 ‘‘(A) WITHHOLDING.—The trustee of a

15 Child Retirement Account shall deduct and

16 withhold from any distribution from such Ac17 count a tax equal to 20 percent of such dis18 tribution.

19 ‘‘(B) NO OTHER TAX.—Distributions from

20 a Child Retirement Account shall not be includ21 ible in gross income.

22 ‘‘(C) CREDIT FOR AMOUNTS WITHHELD

23 ONLY ON QUALIFIED SPECIAL PURPOSE LOAN

24 DISTRIBUTIONS WHICH ARE REPAID.—In the

25 case of an amount withheld under subpara-
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1 graph (A) on a qualified special purpose dis2 tribution from a Child Retirement Account in

3 the form of a loan, there shall be allowed as a

4 credit against the tax imposed by this subtitle

5 for any taxable year an amount which bears the

6 same ratio to the amount withheld as the prin7 cipal amount of such loan which is repaid dur8 ing such taxable year bears to the total prin9 cipal amount of the loan. The credit allowed

10 under the preceding sentence shall be treated as

11 a credit allowed under subpart C of part IV of

12 subchapter A of this chapter and shall be al13 lowed to the account beneficiary.

14 ‘‘(2) PENALTY ON DISTRIBUTIONS NOT USED

15 FOR QUALIFIED PURPOSES.—If any distribution is

16 made from a Child Retirement Account which is not

17 a qualified distribution, the account beneficiary’s tax

18 imposed by this chapter for the taxable year in

19 which such distribution is made shall be increased by

20 an amount equal to 50 percent of such distribution.

21 ‘‘(3) QUALIFIED DISTRIBUTION.—For purposes

22 of paragraph (2), the term ‘qualified distribution’

23 means any distribution—

24 ‘‘(A) made on or after the date on which

the account beneficiary attains age 591 25 ⁄2,
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1 ‘‘(B) made to a beneficiary (or to the es2 tate of the individual) on or after the death of

3 the account beneficiary,

4 ‘‘(C) attributable to the account bene5 ficiary being disabled (within the meaning of

6 section 72(m)(7)), or

7 ‘‘(D) which is a qualified special purpose

8 distribution.

9 ‘‘(4) QUALIFIED SPECIAL PURPOSE DISTRIBU10 TION.—For purposes of paragraph (3), the term

11 ‘qualified special purpose distribution’ means any

12 distribution (including in the form of a loan) from

13 a Child Retirement Account to the account bene14 ficiary—

15 ‘‘(A) if such distribution is a qualified

16 first-time homebuyer distribution, or

17 ‘‘(B) to the extent the aggregate distribu18 tions from the Account does not exceed the

19 qualified higher education expenses of the ac20 count beneficiary for the taxable year in which

21 received.

22 Such term shall not include any distribution from

23 such an Account during a calendar year to the ex24 tent such distribution, when added to the amount of

25 all prior distributions from such Account during the
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1 calendar year and all prior calendar years, exceeds

2 an amount equal to 50 percent of the balance in

3 such Account as of the close of the prior calendar

4 year.

5 ‘‘(5) QUALIFIED FIRST-TIME HOMEBUYER DIS6 TRIBUTIONS.—

7 ‘‘(A) IN GENERAL.—For purposes of this

8 subsection, the term ‘qualified first-time home9 buyer distribution’ means any payment or dis10 tribution received by the account beneficiary to

11 the extent such payment or distribution is used

12 by such beneficiary within a reasonable period

13 to pay qualified acquisition costs with respect to

14 a principal residence for such beneficiary as a

15 first-time homebuyer.

16 ‘‘(B) QUALIFIED ACQUISITION COSTS.—

17 For purposes of this paragraph, the term

18 ‘qualified acquisition costs’ means the costs of

19 acquiring, constructing, or reconstructing a res20 idence. Such term includes any usual or reason21 able settlement, financing, or other closing

22 costs.

23 ‘‘(C) FIRST-TIME HOMEBUYER; OTHER

24 DEFINITIONS.—For purposes of this para25 graph—
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1 ‘‘(i) FIRST-TIME HOMEBUYER.—The

2 term ‘first-time homebuyer’ means any in3 dividual if such individual (and, if married,

4 such individual’s spouse) had no present

5 ownership interest in a principal residence

6 during the 3-year period ending on the

7 date of acquisition of the principal resi8 dence to which this paragraph applies.

9 ‘‘(ii) PRINCIPAL RESIDENCE.—The

10 term ‘principal residence’ has the same

11 meaning as when used in section 1034.

12 ‘‘(iii) DATE OF ACQUISITION.—The

13 term ‘date of acquisition’ means the date—

14 ‘‘(I) on which a binding contract

15 to acquire the principal residence to

16 which subparagraph (A) applies is en17 tered into, or

18 ‘‘(II) on which a binding contract

19 to construct or reconstruct such a

20 principal residence is entered into.

21 ‘‘(6) QUALIFIED HIGHER EDUCATION EX22 PENSES.—For purposes of this subsection—

23 ‘‘(A) IN GENERAL.—The term ‘qualified

24 higher education expenses’ means—
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1 ‘‘(i) expenses for tuition, fees, books,

2 supplies, and equipment required for the

3 enrollment or attendance of the account

4 beneficiary at an eligible educational insti5 tution (as defined in section 135(c)(3)),

6 and

7 ‘‘(ii) reasonable living expenses while

8 away from home while attending such in9 stitution.

10 ‘‘(B) COORDINATION WITH SAVINGS BOND

11 PROVISIONS.—The amount of qualified higher

12 education expenses for any taxable year shall be

13 reduced by any amount excludable from gross

14 income under section 135.

15 ‘‘(7) EXCEPTIONS FROM WITHHOLDING TAX

16 AND PENALTY FOR TRUSTEE-TO-TRUSTEE TRANS17 FERS.—Paragraphs (1)(A) and (2) shall not apply

18 to any trustee-to-trustee transfers from a Child Re19 tirement Account to another Child Retirement Ac20 count of the same account beneficiary.

21 ‘‘(d) APPROVED MUTUAL FUND.—For purposes of

22 this section—

23 ‘‘(1) IN GENERAL.—The term ‘approved mutual

24 fund’ means any fund of any regulated investment

25 company (as defined in section 851(a)) if—
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1 ‘‘(A) an election under section 851(b)(1) is

2 in effect with respect to such company, and

3 ‘‘(B) such fund is designated by the Fed4 eral Retirement Thrift Investment Board for

5 purposes of this section.

6 ‘‘(2) STANDARDS FOR DESIGNATION.—A fund

7 may be designated under paragraph (1) only if the

8 Federal Retirement Thrift Investment Board deter9 mines that it is reasonable to expect that not less

10 than 75 percent of the total value of the assets of

11 such fund are represented by equity securities.

12 ‘‘(e) CERTAIN RULES TO APPLY.—Rules similar to

13 the following rules shall apply for purposes of this section:

14 ‘‘(1) Section 219(f)(3) (relating to time when

15 contributions deemed made).

16 ‘‘(2) Section 408(g) (relating to community

17 property laws).

18 ‘‘(3) Section 408(h) (relating to custodial ac19 counts).

20 ‘‘(f) REPORTS.—The Secretary may require the

21 trustee of a Child Retirement Account to make such re22 ports regarding such Account to the Secretary and to the

23 account beneficiary with respect to contributions, distribu24 tions, and such other matters as the Secretary determines

25 appropriate. The reports required by this subsection shall
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1 be filed at such time and in such manner and furnished

2 to such individuals at such time and in such manner as

3 may be required by the Secretary.’’

4 (b) CONFORMING AMENDMENTS.—

5 (1) TAX ON PROHIBITED TRANSACTIONS.—

6 (A) Section 4975 of such Code (relating to

7 tax on prohibited transactions) is amended by

8 adding at the end of subsection (c) the follow9 ing new paragraph:

10 ‘‘(5) SPECIAL RULE FOR CHILD RETIREMENT

11 ACCOUNTS.—An individual for whose benefit a Child

12 Retirement Account (within the meaning of section

13 529(a)) is established shall be exempt from the tax

14 imposed by this section with respect to any trans15 action concerning such account (which would other16 wise be taxable under this section) if, with respect

17 to such transaction, the account ceases to be a Child

18 Retirement Account by reason of the application of

19 section 529(b)(2) to such Account.’’

20 (B) Paragraph (1) of section 4975(e) of

21 such Code is amended by striking ‘‘or’’ at the

22 end of subparagraph (D), by redesignating sub23 paragraph (E) as subparagraph (F), and by in24 serting after subparagraph (D) the following

25 new subparagraph:
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1 ‘‘(E) a Child Retirement Account described

2 in section 529(a), or’’.

3 (2) FAILURE TO PROVIDE REPORTS ON CHILD

4 RETIREMENT ACCOUNTS.—Paragraph (2) of section

5 6693(a) of such Code is amended by striking ‘‘and’’

6 at the end of subparagraph (A), by striking the pe7 riod at the end of subparagraph (B) and inserting

8 ‘‘, and’’, and by adding at the end the following new

9 subparagraph:

10 ‘‘(C) section 529(f) (relating to Child Re11 tirement Accounts).’’

12 (3) CLERICAL AMENDMENT.—The table of

13 parts for subchapter F of chapter 1 of such Code is

14 amended by adding at the end the following new

15 item:

‘‘Part VIII. Child Retirement Accounts.’’

16 (c) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to taxable years beginning after

18 December 31, 1996.

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