Stop the Presses, Again – New ‘Build Back Better’ Draft Reincludes IRA Constraints for Wealthy
We work hard to keep our clients up to date on the latest developments in Washington, mainly as they pertain to taxes, estate planning and retirement saving.
It’s not exactly a thankless task – we earn our daily bread from it – yet this year, it’s been tricky. The sands keep shifting under our feet, and from week to week, we end up on our tailbones.
Right now, as things stand, the Democratic Party, which barely controls both houses of Congress, has reintroduced some tight-binding restrictions on wealthier citizens’ use of common retirement products, like the IRA and 401(k).
I’ve written about this more than once – yet they keep editing the script in DC. This is the story, fresh off Congressional presses and vetted by Joe in the White House, as of today. What happens tomorrow, well, I’ll have my spyglass extended and keep you informed.
My original intentions were good. I firmly resolved, as the gavel-bashers say, to read the entire bill, entitled the Build Back Better Act, to spare you the bother and give you the straight dope – news reports are confused and bewildering, with all that shimmy-shamming of legislative drafts on the Hill.
I meant well, dear readers – I did. But the draft text, H.R. 5376, is 2,135 pages long.
My mother’s King James Bible, sitting here on my table, from Genesis to Revelation is 1,198 pages long. I messaged my buddy Wahid to discover the page length of his Koran, but he was out selling coffee and bagels to cranky, overtaxed New Yorkers. We know one thing for certain without counting the odds: legislation won’t get you to Heaven. I’m not reading the infernal bill, even for you loyalist readers.
Let’s do what we can with White House releases, Congressional websites, blathering politicos’ videos and the closest-to-trustworthy news sources. It’s all likely to change, but let’s see where we stand at the moment.
The proposed legislation would establish new required minimum distributions (RMDs) for IRAs, linked to their aggregate value. Wealthy retirement savers, listen up. The proposal is complex and costly enough to make an IRS agent grin past his pitchfork. I doubt anyone else is smiling.
The rules current today require retirees take their first RMD by April 1 of the year after they turn 72 (this rule is for seniors who hit 72 post-January 1, 2020). RMDs must then be taken by December 31 of each following year. Failure to take the required payout incurs a penalty of 50% of the distribution – ouch.
Roth IRA holders don’t need to take RMDs and neither do their heirs. If all goes to plan for the Democrats, come the New Year, inherited IRAs (and 401(k) plans) will be subject to RMD rules that require the inheritor to empty the account within a decade. This is good for the tax man, yet would mark the demise of the popular ‘stretch IRA’ strategy, rest in peace. This change is already agreed and will activate once the budget becomes law.
Congress’s latest proposals would require high-income taxpayers – those with adjusted taxable incomes over $400,000 for individuals, $425,000 for heads of household, and $450,000 for married individuals filing joint returns – to take a special RMD if the aggregate account balance of their defined contribution plans exceeds $10 million.
The amount of the ‘special’ is 50% of the account balance that exceeds the $10 million threshold. If your retirement accounts are worth $10,500,000, you would need to take a $250,000, taxable, RMD.
Roth IRA holders do not escape. If a retiree’s accounts total more than $20 million, any “Roth excess amount,” as it is called, would have to be taken in a lump RMD – that’s in addition to the ‘special’.
Say your accounts hold $20,500,000. The excess is $500,000, and if the owner has $500k worth of Roth accounts, a $500k ‘Roth RMD’ would have to be taken – and a $4.5 million ‘special’ (50% of the amount over $10 million, minus the Roth distribution). The standard RMD for retirees over 72 can be deducted from these extraordinary totals – small comfort. Try not to imagine the tax bill before bedtime.
If this synopsis is convoluted, the real rules are worse. A silver lining: under the original legislative proposal, the law would have gone live on January 1, 2022. The proposed launch date is now Day 1, 2029. Tax planners and accountants will have beaucoup time to learn the new ropes, and I bet they’ll need every second to get their clients in line.
Next to fall: the ‘backdoor’ and ‘mega-backdoor’ Roth strategies would be prohibited. I’ve written on this (‘Farewell to a Friend? Congress Takes Aim at ‘Back-Door’ Roth IRAs’), so I’ll keep it simple. First, after-tax contributions to workplace retirement plans would be banned for savers at all income levels, starting on January 1, 2022. Next, anyone with an income over the $400,000 threshold would be prohibited from converting pre-tax plans into Roth IRAs. This little scourging would be postponed until January 1, 2032.
Finally, for now, the proposed legislation would introduce IRA contribution limits on accounts worth over $10 million. This covers the aggregate value of all IRA and Roth IRA accounts held by the saver. This rule only applies to people whose taxable earnings exceed the $400k barrier; it’s hard to imagine it striking at anyone else, barring a sensibly invested Lotto winner – and that would make history. Launch date: t-minus midnight, December 31, 2028.
I hope they produce a final bill soon; this confusion is dragging everyone down. The pottering tussle on Capitol Hill recalls the movie: ‘A Walk in the Sun,’ released 1945, directed by Lewis Milestone. Call it the first draft of ‘Saving Private Ryan,’ made by a man who’d seen WW2 ‘live’.
The movie stars ordinary soldiers – portrayed by fine actors, you’ll enjoy it – who land in Italy, 1943. They have orders: take a long, hot walk to a simple objective and seize it. Every step brings tribulation. If they win and survive, the long walk still continues – all the way to Berlin, the boys say, an improbably long saunter.
‘We’re not stopping in Berlin, anyway,’ intones the platoon philosopher. ‘We’ll just keep on going. Next year, we’ll be in Tibet.’ The men start repeating the mantra: ‘Next year in Tibet; we’ll just keep going.’ That’s what I fear about today’s high-budget drama, ‘Budget 2022’ on the marquee. You see, I’m starting to wonder, like those fabled GIs: is there really a ‘there’ to get to?