Debate: Should the Government Force Mega-RMDs on Massive Retirement Accounts?

A proposal in Biden's budget targets those who have saved at least $10 million in tax-preferred funds.

President Joe Biden’s proposed 2025 federal budget would limit taxpayers’ ability to accumulate excessive retirement account balances.

It would require that taxpayers with at least $10 million in tax-preferred retirement accounts withdraw half the difference between their actual account balance and $10 million each year. For example, a taxpayer with a $12 million retirement account balance in 2025 would be required to take a $1 million withdrawal. If the balance in 2026 reached $11.5 million, a $750,000 withdrawal would be required that year, and so on.

Taxpayers with retirement account balances of at least $20 million would be required to take a distribution to bring the account balance to $20 million or less. The new withdrawal rules would apply only to taxpayers with earnings of at least $400,000 for the year, $450,000 for married couples.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about Biden’s proposal to limit the value of retirement accounts for high-income taxpayers.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink
Byrnes

Their Reasons:

Bloink: For far too long, the wealthiest taxpayers have been able to use their retirement plans as estate planning tools. We’re talking about Americans with extreme accumulations in retirement accounts, to the tune of at least $10 million. Biden’s proposal serves to limit these accounts to their intended purposes and limit the ability of the wealthiest taxpayers to use their tax-preferred retirement accounts as wealth transfer vehicles. 

Byrnes: If we read the fine print on these proposals, the new mandatory withdrawal rules would only apply to taxpayers earning over $400,000 for the year. We have to remember that many of America’s wealthiest taxpayers are asset-rich but actually earn very little income for ordinary income tax purposes. The limits are clearly just a political ploy for Biden to make it seem as though he’s increasing taxes on the wealthy and limiting tax-avoidance loopholes. 

Bloink: Retirement accounts are given such valuable tax preferences to encourage ordinary Americans to save for their own retirements. Instead, the wealthiest Americans are often using these accounts, especially Roth accounts, to pass wealth to future generations without tax liability on their accumulations during life — and, in some cases, even post-mortem. That’s simply not why we give people these tax-preferred savings options.

Byrnes: In reality, the rules may have very little impact on the wealthiest taxpayers. Instead, they could serve to discourage Americans from investing in their own retirement — because if the investments they make within their retirement accounts happen to become wildly successful, they’ll be punished with immediate tax liability.

Bloink: The bottom line is that excessive retirement account accumulations function as a tax loophole that we should want to close. We want to encourage strong and robust retirement savings, of course, but there comes a point where the system becomes abusive. Biden’s plan targets only excessive accumulations and would merely require the wealthy to actually pay taxes on their accumulations like any hard-working American.

Byrnes: Retirement savers have no way to conclusively predict how successful their retirement account investments will become. This entire debate began because of the highly publicized success of Peter Thiel’s investments within Roth accounts. Those investments were largely available to all taxpayers. Punishing taxpayers for the success of their investment strategies is no way to encourage those taxpayers to invest in our economy — whether through tax-preferred retirement accounts or otherwise.

Recommended Stories