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Build Back Better Act Will Limit Retirement Plans For The Rich

US House of Representatives Speaker Nancy Pelosi (Democratic Republic of California) speaks at a news conference following the passage of the Recovery Efficiency Act at the US Capitol in Washington, DC, November 19, 2021.

Al Drago | Reuters

On Friday, the House of Representatives passed legislation that would restrict the use of retirement plans by wealthy Americans.

The new rules are part of a sweeping restructuring of the $ 1.75 trillion tax code. Restore the best actionwhat will be the largest social safety net expansion in decades and the largest effort in US history to combat climate change.

House Democrats passed the party line bill, 220-213. Now he is heading to the Senate.

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Wealthy people with more than $ 10 million in retirement savings will have to withdraw their accounts annually in accordance with the new type of required minimum distribution, or RMD. Legislators will also close the backdoor tax loopholes mostly used by the wealthy and ban further contributions to individual retirement accounts if those accounts exceed $ 10 million.

These measures are aimed at limiting the use of 401 (k) plans and IRAs as tax havens for the rich.

They – along with tax provisions targeting corporations and households making more than $ 400,000 a year – also increase income for universal preschool education, Medicare expansion, renewable energy loans, affordable housing, annual increase in child tax credits, and massive Obamacare subsidies. …

The retirement proposals were included in the initial House of Representatives tax proposal in September. However, the White House removed the pension plan rules from the legislative framework passed on October 28 after lengthy negotiations with dissenting Democratic Party members who were concerned about some tax and other elements of the package.

However, some of the earlier retirement proposals did not reappear in the new iteration.

For example, original legislation prohibited IRA investments such as private equity, which require owners to be so-called “accredited investors,” whose status was tied to wealth and other factors. And some of the rules passed by the House of Representatives on Friday will go into effect years later than originally thought.

Legislation can still be changed in the Senate, where Democrats cannot afford to lose a single vote for the measure to succeed due to the united Republican opposition.

RMD for $ 10 Million Accounts

Backdoor Mouth

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Roth IRAs are especially attractive to high net worth investors. Investment gains and future withdrawals are tax-free (after 59.5 years) and withdrawals at age 72 are not required as in traditional pre-tax accounts.

However, there are income limits for making contributions to the Roth IRA. In 2021, single tax payers will not be able to save in one tax if their income exceeds $ 140,000.

But current law allows high-income people to save in the Roth IRA through backdoor contributions. For example, investors can convert a traditional IRA (which has no income cap) to a Roth account.

Current law also allows mega-backdoor contributions to the Roth IRA, taking advantage of the after-tax savings in the 401 (k) plan. (This process allows the rich to convert much larger amounts of money, as 401 (k) plans have higher annual savings limits than IRAs.)

House law applies to both.

First, it will prohibit converting any after-tax contributions in 401 (k) plans and other jobs and IRAs into Roth savings. This rule will apply to all income levels starting December 31, 2021.

Second, contributors will not be able to convert pre-tax Roth savings into 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 will start after December 31, 2031.

IRA Contribution Limits

Current law allows taxpayers to contribute to the IRA regardless of account size.

However, the law prohibits 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.

The provisions of this section also apply to tax years beginning after December 31, 2028 (As with the RMD provisions, they were to start after December 31, 2021 in the September Chamber proposal).

The rule will apply to single tax payers if income exceeds $ 400,000; married couples over $ 450,000; and heads of families worth more than $ 425,000.


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