Build Back Better Act would curb the retirement plans of the rich
House Speaker Nancy Pelosi, D-Calif., Chairs the vote for the Build Back Better Act at the U.S. Capitol on November 19, 2021.
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The House of Representatives passed a law on Friday that would reduce the way wealthy Americans use pension plans.
The new rules are part of a sweeping tax code restructuring tied to the $ 1.75 trillion Build Back Better Act, which would represent the biggest social safety net expansion in decades and the biggest effort in the world. history of the United States to fight climate change.
House Democrats passed the bill along party lines, 220-213. He is now heading for the Senate.
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High net worth individuals with more than $ 10 million in retirement savings are expected to dip into their accounts each year, under a new type of minimum required distribution, or RMD. Lawmakers would also close “backdoor Roth” tax loopholes, widely used by the wealthy, and ban individual re-contributions to retirement accounts once those accounts exceed $ 10 million.
The measures aim to curb the use of 401 (k) plans and IRAs as tax shelters for the wealthy.
They – along with tax provisions aimed at businesses and households earning more than $ 400,000 a year – also generate revenue for Universal Pre-K, Medicare expansion, renewable energy credits, affordable housing, one year of expanded child tax credits and major Obamacare grants.
The retirement proposals were included in an initial House tax proposal in September. However, the White House removed the pension plan rules from a legislative framework released on October 28 after lengthy negotiations with recalcitrant Democratic Party members who were concerned about certain tax and other elements of the package.
However, some of the earlier retirement proposals did not reappear in the new iteration.
For example, the original legislation would have prohibited IRA investments like private equity that require owners to be “accredited investors”, status related to wealth and other factors. And some of the rules passed by the House on Friday would come into effect years later than originally proposed.
Legislation is still subject to change in the Senate, where Democrats cannot afford to lose a single vote for the measure to succeed due to the unified Republican opposition.
RMD for $ 10 million accounts
Currently, RMDs for account holders are linked to age rather than wealth. Owners of Roth IRAs are also not subject to such distributions under applicable law. (One exception: inherited IRAs on death.)
House legislation would add to those rules, requiring wealthy savers of all ages to withdraw a large chunk of aggregate retirement balances each year. They would potentially be liable for income tax on the funds.
The formula is complex, based on factors such as the size and type of account (pre-tax or Roth). Here’s the general premise: Account holders must withdraw 50% of accounts valued over $ 10 million. Large accounts must also withdraw 100% of the size of the Roth account in excess of $ 20 million.
Distributions would only be required for persons with incomes over $ 400,000. The threshold would be $ 450,000 for married taxpayers filing jointly and $ 425,000 for heads of households.
The provision would begin after December 31, 2028, according to the latest available summary of the legislation. (This would have started after December 31, 2021 in the September House proposal.)
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Roth IRAs are particularly attractive to high net worth investors. Investment growth and future withdrawals are tax-free (after 59.5), and no withdrawals are required at age 72, as is the case with traditional pre-tax accounts.
However, there are income limits for contributing to Roth IRAs. In 2021, single taxpayers will not be able to save in one if their income exceeds $ 140,000.
But current law allows high-income people to save in a Roth IRA through backdoor contributions. For example, investors can convert a traditional IRA (which has no income limit) into a Roth account.
Current law also allows “mega backdoor” contributions to a Roth IRA using the after-tax savings in a 401 (k) plan. (This process allows the wealthy to convert much larger sums of money, because 401 (k) plans have higher annual savings limits than IRAs.)
The House bill would deal with both.
First, it would prohibit converting all after-tax contributions to 401 (k) and other work plans and IRAs into Roth savings. This rule would apply to all income levels as of December 31, 2021.
Second, savers would not be able to convert their pre-tax savings into 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 December 31, 2031.
IRA contribution limits
Current law allows taxpayers to make IRA contributions regardless of the size of the account.
However, the law would prohibit individuals from contributing more to a Roth IRA or traditional IRA if the total value of their combined retirement accounts (including work plans) exceeds $ 10 million.
The provisions in this section also apply to tax years beginning after December 31, 2028. (As with the RMD provisions, they would have started after December 31, 2021 in the September House proposal.)
The rule would apply to single taxpayers once income exceeds $ 400,000; married couples over $ 450,000; and heads of households over $ 425,000.