On September 13, 2021, the House Ways and Means Committee released draft legislation that proposes a series of tax increases and tax cuts, which will undergo a round of markups by the committee over the next few days. Most tax proposals were expected; however, the House provided a few that were not anticipated. Here’s a look at the tax proposals that relate to retirement planning.
Retirement Plan Provisions
Annual Contributions to Plans
Annual contributions to retirement plans are not currently limited by the value of the retirement plans owned by a taxpayer. The proposal would prohibit annual contributions by “applicable taxpayers” to “applicable retirement plans” (which includes tax-qualified defined contribution plans, IRC Section 403(b) and 457(b) plans, and traditional and Roth IRAs) if the total value of all the taxpayer’s applicable retirement accounts exceeds $10 million as of the end of the prior year. Applicable taxpayers are head of household filers with adjusted taxable income in excess of $425,000, married individuals filing joint and surviving spouses with adjusted taxable income in excess of $450,000, and all other taxpayers with adjusted taxable income in excess of $400,000. Both the $10 million cap and income limitations are indexed for inflation beginning after 2022. The proposal would be effective for taxable years beginning after December 31, 2021.
Minimum Required Distributions from Plans
Taxpayers are not currently required to take additional distributions if the total value of their retirement plan accounts exceeds $10 million. The proposal would require applicable taxpayers (as defined above) of any age to take a minimum required distribution equal to 50% of the aggregate vested balances in applicable retirement plans in excess of $10 million. In other words, if an applicable taxpayer’s combined retirement plan account balances exceed $10 million at the end of the taxable year, the taxpayer must take a minimum required distribution in the following year equal to 50% of the amount in excess of $10 million.
Further, if the taxpayer’s combined retirement plan account balances exceed $20 million, the taxpayer would be required to take distributions equal to the lesser of (i) the aggregate plan balances in excess of $20 million or (ii) the aggregate balances in Roth IRAs and designated Roth accounts in defined contribution plans. Once the taxpayer distributes the amount of any excess required under this distribution rule, the taxpayer then would be allowed to determine the retirement accounts from which to make distributions in satisfaction of the 50% distribution rule.
The proposal would be effective for tax years beginning after December 31, 2021.
Roth Rollovers and Conversions
The current definition of a qualified rollover or conversion does not exclude any portion of the rollover or contribution that is not includible in gross income. The proposed legislation would amend the definition of qualified rollovers and conversions to Roth IRAs to include only amounts that would be includible in gross income and subject to tax. The proposal would be effective for rollovers and conversions made after December 31, 2021.
“Back Door” Roth IRAs
“Back door” Roth IRA strategies currently allow taxpayers who exceed existing Roth income limits to make nondeductible contributions to a traditional IRA, and shortly thereafter, convert the nondeductible contribution from the traditional IRA to a Roth IRA. Current law also allows taxpayers to contribute to a Roth 401(k) plan regardless of income limits (including making non-Roth after-tax contributions) and convert such contributions to a Roth IRA. The proposal would prohibit applicable taxpayers from engaging in these “back door” Roth IRA strategies.
To eliminate these strategies, the proposal would prohibit Roth conversions, for both IRAs and employer-sponsored plans, for applicable taxpayers, as defined above. The proposal would be effective for distributions, transfers and contributions made in taxable years beginning after December 31, 2031 (10 years from now). However, for taxable years beginning after December 31, 2021, the proposal would prohibit all employee after-tax contributions in tax-qualified retirement plans and would prohibit after-tax IRA contributions from being converted to Roth IRAs regardless of income level.
IRAs and Accredited Investor
The proposed legislation would prohibit IRAs from holding any security that requires the IRA owner to be an accredited investor. This proposal would be effective for taxable years beginning after December 31, 2021, but with a two-year transition period for investments already held in an IRA as of the date of enactment.
IRAs and Self-Dealing
To prevent self-dealing, the proposal would expand the definition of “prohibited investments” in an IRA to include investments in which the IRA owner has a substantial interest. A substantial interest is defined as (a) a direct or indirect interest in investments not tradeable on an established securities market in which the IRA owner has at least 10% of the (i) combined voting power or value of all classes of stock, (ii) capital or profits interest of a partnership, or (iii) beneficial interest of a trust or estate; or (b) a corporation, partnership, or other unincorporated enterprise in which the IRA owner is an officer or director (or holds a similar position). The proposal makes this provision a requirement to be a valid IRA.
The proposal would be effective for investments made in taxable years beginning after December 31, 2021, but with a two-year transition period for investments already held in an IRA as of the date of enactment.
It’s important to note that these tax proposals have not yet been passed or finalized. As this situation continues to evolve, our teams at BerganKDV will monitor and keep you updated on any key information that may impact your tax planning. If you have any questions regarding you and your business’s tax planning strategy, BerganKDV can help. Contact us today and one of our experienced professionals will be happy to assist you.
There are also significant changes in the proposal affecting trusts and individuals and businesses – you can read more about these provisions here:
The views and strategies described are those of BerganKDV Wealth Management and may not be suitable for all investors. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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