Mega IRA Legislation
Democrats on Congressional tax-writing committees have introduced new legislation to curb the use of so-called mega IRAs. This latest legislation prohibits taxpayers from continuing to contribute to retirement accounts if their total IRA and defined contribution plan balances exceeded $10 million in the prior year. The legislation would also apply the 6% penalty tax on excess contributions to contributions prohibited under this law. Finally, the legislation would require a minimum distribution once a taxpayer's account balances exceed $10 million, if the account owner's incomes exceed $450,000 ($400,000 for single filers).
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about the latest legislation designed to prevent tax benefits for mega IRAs.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Bloink: This new legislation would go a long way toward stopping the wealthiest Americans from using tax-preferred retirement savings vehicles to avoid paying their fair share of taxes. We're talking about account balances in excess of $10 million owned by taxpayers who earn roughly half a million dollars per year. These taxpayers are using tax-preferred retirement accounts as a loophole to avoid paying the taxes they owe.
Byrnes: This new legislation is just another attempt by the socialist democrats to penalize those Americans who have worked hard and earned success. Regardless of income level, we want to encourage Americans to save to fund their own retirements. This legislation would essentially impose a retroactive penalty for taxpayers who have funded their tax-preferred retirement accounts to the fullest extent possible.
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Bloink: Retirement accounts are given tax preferences to incentivize hard working Americans to save so that they can have dignified retirements. Closing loopholes such as the ability to shield excessive funds within retirement vehicles is a matter of basic tax fairness. Many of the wealthiest taxpayers invest in assets that are that are not available to most ordinary investors—assets that are initially valued at extremely low levels and offer disproportionately high investment returns. These aren't returns that should fairly be shielded within the retirement vehicle.
Byrnes: The proposal would require taxpayers to withdraw half of their balances in excess of $10 million each year and pay taxes on those amounts--likely at the highest income tax rates that exist. This would result in a situation where these Americans would be forced to pay much more in taxes on the amounts withdrawn than would otherwise be the case--because the lump sum withdrawals could be much higher than what the RMD would be if the individual had reached their required beginning date and was taking RMDs based on the existing formula.
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Bloink: Requiring taxpayers who have amassed mega IRAs to withdraw funds in excess of $10 million and pay taxes on that excess would restore fairness to the tax system. Retirement accounts simply aren't meant to give the wealthiest taxpayers yet another tax avoidance avenue. This legislation would go a long way toward preventing the super-rich from manipulating the tax code to shield massive amounts of wealth from taxation.
Byrnes: The bottom line is that we have a retirement savings system designed to incentivize saving. We shouldn't retroactively change the rules and penalize taxpayers who have taken advantage of the existing incentives to amass significant retirement savings. Taxpayers should not be penalized for their success, and they should not be penalized for using options that are legally available to minimize their taxable income.