What You Need to Know
- The proposals will not likely see much pushback as most of them target a small group of IRA holders, Slott said.
- Inadvertently, Slott says, lawmakers have answered the question of whether mega backdoor Roth IRAs are legal.
- The House Ways and Means Committee plans to vote on the proposals this week.
House Ways and Means Committee Chairman Richard Neal’s plan to usher in several changes to individual retirement accounts “will not likely see much pushback because most people will never have to worry about their IRA balances exceeding $20 million,” IRA and tax specialist Ed Slott of Ed Slott & Co. told ThinkAdvisor late Monday in an email. “And the few who do will easily move on to the next workaround that Congress has not yet thought of.”
The committee’s plans to vote Tuesday and Wednesday on several changes to individual retirement accounts, part of a much larger tax package, “are focused on a small group with big retirement account balances,” Slott said.
Committee Chairman Richard Neal’s plan, released Monday, prohibits taxpayers from contributing to their IRAs once their account balance exceeds $10 million, increases the required minimum distributions for high-income taxpayers with large balances and eliminates so-called backdoor Roth IRA strategies for certain taxpayers.
Congress, Slott said, “believes that these [IRA] accounts were meant for more modest savers who will rely on these funds for their retirement years, and not as a way for the government to ‘subsidize’ tax benefits for the super-rich on tens of millions of dollars.”
Some of Neal’s proposals “target a microscopic group of those with retirement accounts in excess of $10 and $20 million which, compared to the tens of millions who have IRAs, is like a grain of sand on the beach,” Slott maintained.
Slott offered the following insight on Neal’s planned changes to IRAs.
Limit on IRA Contributions for Mega-IRAs
Neal’s plan prohibits further contributions to a Roth or traditional IRAs for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. This limit would apply to taxpayers with income in excess of $400,000 (single), or $450,000 (married-joint).
“This seems sensible, but I don’t see this making that much of a difference to anyone with over $10 million in their retirement accounts,” Slott said. “For example, the maximum IRA (or Roth IRA) contribution for 2021 is only $6,000 (and $7,000 if 50 or over). Plus, there is no such restriction in the proposal for limits to 401(k) contributions where these same people could still contribute up to $19,500 to a company plan (or up to $26,000 if age 50 or over).”
Also, Slott pointed out, “notice the big marriage penalty here. The single limit is $400,000 while the married joint limit is $450,000. Two singles could have up to a combined $800,000 limit.”
If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This RMD would be 50% of the balance above $10 million, and this provision would apply to those with incomes over the same limits as above ($400,000/$450,000), Slott explained.
In addition, if combined retirement account balances exceed $20 million, then the excess over $20 million must be distributed from Roth accounts (Roth IRAs and company plan Roth accounts). “This RMD would be based on the lower of the amount needed to bring the combined balances down to $20 million or the balance in all Roth accounts, including Roth 401(k)s,” Slott said.
He added: “This would obviously deter savers from exceeding these limits in their retirement accounts, but again, this is very small population. Nonetheless, this will probably sell well to most people who have nowhere near these staggering account balances.”