Will Rules Targeting "Rich" Roths Wreck Retirement?

One of the key retirement provisions in the Build Back Better Act (approved by the House Ways & Means Committee on September 15) targets the use of Roth IRAs by high-income individuals, and/or those who have accumulated significant balances.  What do you think of these provisions. 

The Wall Street Journal highlighted the issue(s) in a recent article titled “Retirement Savers Love the Backdoor Roth IRA Strategy. It Might Not Last”.  A more detailed (and focused “deeper dive”) analysis by ARA Retirement Education Counsel Robert Richter appeared last week[i] in NAPA-Net.  The “problem”, at least as seen by lawmakers is simple – the solutions, as you might expect, are – well, let’s say “complicated.” 

This week, we’d like to know what you think – and what you’re hearing – about each of these key elements. 

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* 1. One of the key provisions of the Build Back Better Act is the imposition of a new Required Minimum Distribution (RMD) for high-income taxpayers effective after Dec. 31, 2021. This new RMD (generally 50% of the value of the defined contribution accounts in excess of $10 million, as adjusted for cost-of-living increases) applies to high-income taxpayers who have aggregate account balances in defined contribution plans (i.e., qualified plans, 403(a) and (b) arrangements, governmental 457(b) plans and IRAs), over $10 million (as adjusted for cost-of-living increases (COLAs).  Which ONE of the following do you find to be most applicable in response?

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* 2. Effective after 2021, high-income taxpayers would be prohibited from making “annual additions” to an individual retirement plan (i.e., a traditional or Roth IRA) for a taxable year – specifically those who, as of the close of the preceding calendar year, have aggregate vested accounts in all defined contribution plans (i.e., qualified plans, 403(a) and (b) arrangements, governmental 457(b) plans and IRAs) that exceed $10 million (as adjusted for COLAs).  Which ONE of the following do you find to be most applicable in response?

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* 3. A participant in a qualified plan would no longer be able to make an after-tax contribution to the plan and then immediately roll that amount over to a Roth IRA (the mega-Roth). Likewise, an individual who is limited to making a Roth IRA contribution due to the compensation limits would no longer be able to make an after tax-contribution to a traditional IRA and then convert that amount to a Roth IRA (the backdoor Roth). Note that this prohibition would apply to all taxpayers, regardless of their income or the value of their retirement accounts.Which ONE of the following do you find to be most applicable in response?

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* 4. The bill provides an additional limitation on high-income taxpayers who have account balances that exceed $10 million. These individuals would be prohibited from electing any type of Roth conversion (i.e., in a qualified plan or in a Roth IRA). The only rollovers they would be able to make would be between designated Roth accounts and/or Roth IRAs.  Which ONE of the following do you find to be most applicable in response?

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* 5. The bill would make numerous changes to the investments that may be made in an IRA.  The first restriction prohibits IRAs from investing in any security where the issuer of the security requires the investor to:     have a specified minimum of income or assets; have completed a specified level of education; or hold a specific license or credential.  Which ONE of the following do you find to be most applicable in response?

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* 6. The second change to permissible IRA investments is that the bill would prohibit an IRA to be invested in any investment where the IRA owner owns 10% or more of the entity (currently this is 50% or more) or where the IRA owner is an officer or director.  Which ONE of the following do you find to be most applicable in response?

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* 7. The current 3-year statute of limitations for any substantial errors (willful or otherwise) relating to the reporting of the valuation of IRAs would be extended to 6 years. Similarly, the statute of limitations would be extended to 6 years for any taxes due to an IRA losing its tax-exempt status.Which ONE of the following do you find to be most applicable in response?

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* 8. What is your role working with retirement plans?

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* 9. What size plans do you PRIMARILY work with?

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* 10. Suggestions for future survey questions?  Seriously - what would you like to know about/from your fellow NAPA-Net readers?  Or what would you like to be asked?

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* 11. All responses are confidential, of course - but just in case you would like a response - or want me to know you responded - or just want to say hi - here's your chance to do so (don't forget your email)!

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