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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
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 cal-
endar 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 RE-
DUCED
CONTRIBUTION.—If there is a reduction
under this subsection in the amount transferred
under subsection (a) to the Child Retirement Ac-
count 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 individ-
ual may (at such time and in such manner as the
Secretary may prescribe) contribute to the Child Re-
tirement 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 CHIL-
DREN OF HIGH INCOME PARENTS.—If, with respect
to an individual described in paragraph (1), the ad-
justed gross income of the applicable taxpayer for
the taxable year ending with or within 1997 exceeds
the threshold amount, the amount otherwise deter-
mined under paragraph (1) with respect to such in-
dividual 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 indi-
vidual filing a separate return.
(2) THRESHOLD AMOUNT.—The term ‘‘thresh-
old 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 indi-
vidual filing a separate return.
(3) APPLICABLE TAXPAYER.—The term ‘‘appli-
cable 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 subpara-
graph (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 organi-
zations) 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 ac-
cepted 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 ben-
eficiary 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 Ac-
count is exempt from taxation under this subtitle
unless such account has ceased to be a Child Retire-
ment Account. Notwithstanding the preceding sen-
tence, any such Account is subject to the taxes im-
posed by section 511 (relating to imposition of tax
on unrelated business income of charitable, etc., or-
ganizations).
‘‘(2) ACCOUNT TERMINATIONS.—Rules similar
to the rules of paragraphs (2) and (4) of section
408(e) shall apply to Child Retirement Accounts; ex-
cept 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 Ac-
count a tax equal to 20 percent of such dis-
tribution.
‘‘(B) NO OTHER TAX.—Distributions from
a Child Retirement Account shall not be includ-
ible 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 subpara-
graph (A) on a qualified special purpose dis-
tribution 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 prin-
cipal amount of such loan which is repaid dur-
ing such taxable year bears to the total prin-
cipal 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 al-
lowed 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 591⁄2,
‘‘(B) made to a beneficiary (or to the es-
tate of the individual) on or after the death of
the account beneficiary,
‘‘(C) attributable to the account bene-
ficiary being disabled (within the meaning of
section 72(m)(7)), or
‘‘(D) which is a qualified special purpose
distribution.
‘‘(4) QUALIFIED SPECIAL PURPOSE DISTRIBU-
TION.—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 bene-
ficiary—
‘‘(A) if such distribution is a qualified
first-time homebuyer distribution, or
‘‘(B) to the extent the aggregate distribu-
tions from the Account does not exceed the
qualified higher education expenses of the ac-
count 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 ex-
tent 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 DIS-
TRIBUTIONS.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ‘qualified first-time home-
buyer distribution’ means any payment or dis-
tribution 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 res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(C) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) FIRST-TIME
HOMEBUYER.—The
term ‘first-time homebuyer’ means any in-
dividual 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 resi-
dence 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 en-
tered into, or
‘‘(II) on which a binding contract
to construct or reconstruct such a
principal residence is entered into.
‘‘(6) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—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 insti-
tution (as defined in section 135(c)(3)),
and
‘‘(ii) reasonable living expenses while
away from home while attending such in-
stitution.
‘‘(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
TRANS-
FERS.—Paragraphs (1)(A) and (2) shall not apply
to any trustee-to-trustee transfers from a Child Re-
tirement Account to another Child Retirement Ac-
count 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 Fed-
eral 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 deter-
mines 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 ac-
counts).
‘‘(f) REPORTS.—The Secretary may require the
trustee of a Child Retirement Account to make such re-
ports regarding such Account to the Secretary and to the
account beneficiary with respect to contributions, distribu-
tions, 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 follow-
ing 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 trans-
action concerning such account (which would other-
wise 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 sub-
paragraph (E) as subparagraph (F), and by in-
serting after subparagraph (D) the following
new subparagraph: