U.S. Speaker of the House Rep. Nancy Pelosi (D-CA) speaks as she joins religious leaders during a news conference outside the U.S. Capitol October 20, 2021 in Washington, DC.<\/p>\n
Alex Wong | Getty Images<\/p>\n
House Democrats proposed several rules to curb retirement accounts of the rich, part of a broad restructuring of the tax code tied to the party's Build Back Better social and climate spending package.<\/p>\n
Wealthy individuals with more than $10 million in retirement savings would have to draw down their accounts each year, in a new type of required minimum distribution, or RMD, according to updated legislation issued Wednesday evening by the House Budget Committee.<\/p>\n
Lawmakers would also close \"backdoor Roth\" tax loopholes for the rich, and prohibit further individual retirement account contributions once those accounts exceed $10 million.<\/p>\n
The measures are aimed at curbing the use of 401(k) plans and IRAs as tax shelters for the wealthy.<\/p>\n
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The proposals were included in an initial House tax proposal in September. However, the White House stripped the retirement-plan rules from a $1.75 trillion framework issued Oct. 28 after lengthy negotiations with holdout members of the Democratic party, who were concerned about some tax and other elements of the package.<\/p>\n
Some of the earlier retirement proposals didn't re-appear in the new iteration, however.<\/p>\n
For example, the initial legislation would have disallowed IRA investments like private equity that require owners to be so-called \"accredited investors,\" a status tied to wealth and other factors.<\/p>\n
And some of the rules would kick in years later than originally proposed.<\/p>\n
The legislative draft, which is still subject to change, aims to raise taxes on households making more than $400,000 a year and corporations in order to fund expanded access to child care, home care and health care; cut taxes for low and middle earners; and invest in measures to curb climate change.<\/p>\n
Republicans staunchly oppose the plan. Democrats, who have razor-thin margins, can't afford to lose a vote on the Senate and hardly any in the House for the measure to pass.<\/p>\n
It's unclear how will the Senate will ultimately land on the tax measures and other aspects of the broad package.<\/p>\n
\"It's sort of like a chess game,\" Robert Keebler, an accountant and estate planner based in Green Bay, Wisconsin, said. \"When will the Senate make its move?\"<\/p>\n
Currently, RMDs for account owners are tied to age instead of wealth. Roth IRA owners also aren't subject to these distributions under current law. (One exception: inherited IRAs at death.)<\/p>\n
The House legislation would add to those rules, asking wealthy savers of all ages to withdraw a large share of aggregate retirement balances annually. They'd potentially owe income tax on the funds.<\/p>\n
The formula is complex, based on factors like account size and type of account (pretax or Roth). Here's the general premise: Accountholders must withdraw 50% of accounts valued at more than $10 million. Larger accounts must also draw down 100% of Roth account size over $20 million.<\/p>\n
The distributions would only be required for individuals whose income exceeds $400,000. The threshold would be $450,000 for married taxpayers filing jointly and $425,000 for heads of household.<\/p>\n
The provision would start after Dec. 31, 2028. (It would have begun after Dec. 31, 2021 in the September House proposal.)<\/p>\n
People with millions of dollars in retirement savings would likely change their financial plans to circumvent the rules' impact if they're adopted, Keebler said.<\/p>\n
\"There may be people already at $6 million [for example] who might decide not to put more money into their IRAs, but into life insurance or other statutory tax shelters,\" Keebler said.<\/p>\n
imagedepotpro | E+ | Getty Images<\/p>\n
Roth IRAs are especially attractive to wealthy investors. Investment growth and future withdrawals are tax-free (after age 59), and there aren't required withdrawals at age 72 as with traditional pre-tax accounts.<\/p>\n
However, there are income limits to contribute to Roth IRAs. In 2021, single taxpayers can't save in one if their income exceeds $140,000.<\/p>\n
But current law allows high-income individuals to save in a Roth IRA via \"backdoor\" contributions. For example, investors can convert a traditional IRA (which doesn't have an income limit) to a Roth account.<\/p>\n
Current law also allows for \"mega backdoor\" contributions to a Roth IRA using after-tax savings in a 401(k) plan. (This process lets the wealthy convert much larger sums of money, since 401(k) plans have higher annual savings limits than IRAs.)<\/p>\n
The House legislation would address both.<\/p>\n
Firstly, it would prohibit any after-tax contributions in 401(k) and other workplace plans and IRAs from being converted to Roth savings. This rule would apply to all income levels starting after Dec. 31, 2021.<\/p>\n
Secondly, savers would be unable to convert pre-tax to Roth savings in IRAs and workplace retirement plans if their taxable income exceeds $400,000 (single individuals), $450,000 (married couples), or $425,000 (heads of household). It would start after Dec. 31, 2031.<\/p>\n
Current law lets taxpayers make IRA contributions regardless of account size.<\/p>\n
However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined retirement accounts (including workplace plans) exceeds $10 million.<\/p>\n
The provisions of this section are effective tax years beginning after December 31, 2028. (It would have begun after Dec. 31, 2021 in the September House proposal.)<\/p>\n
The rule would apply to single taxpayers once income is over $400,000; married couples over $450,000; and heads of household over $425,000.<\/p>\n
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Democrats put 401(k) and IRA restrictions for the rich back into their Build Back Better plan - CNBC<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" U.S. Speaker of the House Rep Continue reading