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House Ways and Means Committee Tax Proposal Includes Significant Retirement Planning Modifications

Posted by : on : September 21, 2021 | 5:01 pm

The House Ways and Means Committee proposal provides significant changes to the administration and taxation of individual retirement accounts. A particular focus was placed on those who hold IRA account balances in excess of $10 million. Provided below is a summary of the proposed changes.

 

Prohibition of IRA Contributions

 

Taxpayers would be prohibited from contributing to their IRAs once their aggregate IRA and defined contribution account balances exceed $10 million, and their taxable income exceeds the following thresholds:

    • Single – Taxable income over $400,000
    • Head of Household – Taxable income over $425,000
    • Married Filing Jointly – Taxable income over $450,000

 

Required Minimum Distribution of Large Retirement Accounts

 

There would be increased required minimum distributions for high-income taxpayers with large retirement account balances. The tax law sets forth a $10 million limitation and $20 million limitation.

 

If an individual’s aggregate traditional IRA, Roth IRA and defined contribution plan account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. The required minimum distribution generally would be 50 percent of the amount by which the individual’s prior year aggregate account balance exceeded the $10 million threshold.

 

The minimum distribution would only be required if the taxpayer’s taxable income is above the following taxable income thresholds

    • Single – Taxable income over $400,000
    • Head of Household – Taxable income over $425,000
    • Married Filing Jointly – Taxable income over $450,000

 

Additionally, for those taxpayers with an aggregate account balance exceeding $20 million, the excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of the following:

    • Amount needed to bring the total balance in all accounts down to $20 million; or
    • Aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.

 

Once an individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual would be allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule described above. Therefore, the taxpayer would only be required to distribute from Roth accounts to meet the $20 million threshold requirement.

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Back-Door Roth IRAs Limited

 

Roth IRAs have traditionally had income thresholds which once exceeded by a taxpayer, such taxpayer can no longer make contributions to Roth accounts. However, this limit can be bypassed by making a nondeductible contribution to a traditional IRA account and then converting that amount from the traditional IRA to a Roth IRA. This is strategy is often referred to as a “back-door” Roth IRA.

 

The proposal would eliminate Roth IRA conversions for both IRAs and employer-sponsored plans for taxpayers with taxable income over the following thresholds:

    • Single – Taxable income over $400,000
    • Head of Household – Taxable income over $425,000
    • Married Filing Jointly – Taxable income over $450,000

 

Notably, the proposed legislation provides that this element of the law would apply to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

 

However, the legislation would also prohibit all employee after-tax contributions in qualified plans as well as after-tax IRA contributions from being converted to Roth IRAs regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

 


The ultimate effect would be the near-term elimination of mega back-door Roth IRA after-tax contributions and the eventual elimination of pre-tax back door Roth IRA contributions for those exceeding the income threshold.

 

Prohibition of Certain IRA Investments

 

The proposed legislation would also prohibit an IRA from holding any security if the issuer of the security requires the IRA owner to have a certain minimum level of assets or income or have completed a minimum level of education or obtained a specific license or credential. For example, the legislation would prohibit IRAs from holding investments which are offered to accredited investors because those investments are securities that have not been registered under federal securities laws. IRAs holding such investments would lose their IRA status. The legislation does provide a two-year transition period for IRAs already holding such investments.

 

Prohibition of Investment of IRA Assets in Entities in Which Owner has Substantial Interest

 

Under current tax law, an IRA owner cannot invest IRA assets in a corporation, partnership, trust, or estate in which the owner has a 50 percent or greater interest. This rule is provided to prevent self-dealing under current prohibited transaction rules. The legislation would modify the 50 percent to 10 percent for investments that are not tradeable on an established securities market, whether or not the IRA owner has a direct or indirect ownership interest.

 

Importantly, the legislation would make the rule an IRA requirement rule, as opposed to a prohibited transaction rule. While the provision would generally take effect for taxable years beginning after December 31, 2021, the legislation does provide a two-year transition period for IRAs already holding these investments.

 

Expansion of Statute of Limitations

 

The statute of limitations for IRA noncompliance would be expanded from three years to six years to heighten enforcement of the proposed changes.

 

Important Points for Consideration

 

  • Roth IRAs would lose some of the benefits otherwise available under current law.

  • For those who have considered a back-door Roth IRA strategy, the time to do this may be now.

  • For those who consider using IRA accounts to purchase “special investments,” such as a hedge fund, the opportunity to do this may be closing.

  • Much of these proposed limitations are driven heavily by the taxpayer’s taxable income. If passed, then much consideration would be made to limit taxable income to prevent these austere provisions from providing the adverse impact. High income retirees will need to focus on their tax projection to try to avoid these proposed changes.

 

While these are merely proposed tax law changes at this point, taxpayers should begin to consider the potential impact that such changes would have on their retirement planning.

 

FGMK continues to monitor proposed tax law changes. If you have questions regarding tax planning opportunities, please contact FGMK.

 

 


The summary information in this document is being provided for education purposes only. Recipients may not rely  on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.

 

About FGMK

 

FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For over 50 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.