Tax Private Client Finance Insurance

Democrats in Washington have been working to advance the Biden administration’s economic and social policy agenda through a two-bill legislative package: a $550 billion bipartisan infrastructure bill focused on so-called “hard infrastructure,” i.e., roads and bridges, and a $3.5 trillion budget reconciliation bill focused on domestic priorities. On September 13, House Democrats introduced new proposed tax changes to pay for the domestic portion of the president’s “Build Back Better” agenda that, among many other things, would largely affect “high-income individuals” and curtail their ability to plan for retirement in tax-advantaged accounts. Below is a breakdown of the current proposals approved by the House Ways and Means Committee on September 15 with a proposed effective date for tax years beginning after December 31, 2021, unless otherwise indicated. 

  1. Annual contributions to Roth or traditional individual retirement accounts (IRA) would generally be prohibited for a taxable year if the total value of an individual’s IRA and defined contribution retirement plans exceeds $10 million as of the end of the prior taxable year. This limit would apply to “high-income taxpayers” with adjusted gross income greater than $400,000 for single taxpayers ($450,000 for married filing jointly or $425,000 for individuals who are heads of household). These thresholds would be indexed for inflation annually, and an excise tax would apply if prohibited annual additions were made to an IRA.
  2. Minimum distributions would be required for individuals with adjusted taxable income exceeding the thresholds described above if that individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances exceed $10 million (indexed annually for inflation) at the end of the previous taxable year. In general, the minimum distribution would be 50 percent of the amount by which the individual’s prior-year aggregate traditional IRA, Roth IRA, and defined contribution account balances exceed the $10 million limit. 

    In addition, if a high-income individual’s aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds $20 million, the excess would be required to be distributed from Roth IRAs and Roth-designated accounts in defined contribution plans up to the lesser of either the amount needed to bring the total balance in all accounts down to $20 million or the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. The individual participant would have the discretion to determine the accounts from which to distribute to satisfy the 50 percent rule; however, distributions must apply first to Roth excess amounts in Roth IRAs and then to Roth-designated accounts.
  3. Roth conversions for both IRAs and employer-sponsored plans for high-income individuals would be eliminated. This provision would apply to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. 
  4. Individuals would no longer be able to complete two-step Roth IRA contributions, informally known as “backdoor” Roth contributions. Currently, certain taxpayers exceeding the income limits to make a direct contribution to a Roth IRA can make a nondeductible IRA contribution and then roll this contribution over to a Roth IRA. 
  5. IRAs would be prohibited from holding investments where the issuer of the security requires the IRA owner to have a certain minimum level of assets or income or have completed a minimum level of education or obtained a specific license or credential, i.e., securities requiring accredited investor status. In addition, IRAs would be prohibited from holding entities in which the account owner holds a 10 percent or greater interest (a decrease from the current 50 percent threshold), foreign sales corporations, and domestic international sales corporations. This provision would take effect for tax years beginning after December 31, 2021; however, there would be a two-year transition period for IRAs already holding prohibited assets.

While the legislation is far from final at this point and the outlook for enactment is uncertain, the proposals currently on the table would dramatically reshape the retirement planning landscape for high-income taxpayers. For more information on the other tax proposals introduced, see our recent BKD Thoughtware® alert. To better understand how these proposals might affect your retirement planning, contact a member of the BKD Private Client team.

FORVIS Private Client services may include investment advisory services provided by FORVIS Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by FORVIS, LLP. The information in this presentation should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies, mentioned in this presentation may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax, or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.

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