Tax Proposals Include New Retirement Plan Rules for High-Income Individuals

Changes to retirement accounts for high-income individuals are part of a proposed restructuring of the tax code tied to a $3.5 trillion budget plan. The House Ways and Means Committee and the Joint Committee on Taxation previously released summaries of proposed tax changes intended to help fund this spending package.

We expect modifications as the legislative process continues, but here are proposed retirement plan changes worth keeping an eye on.

New Limit on Contributions to Roth and Traditional IRAs

Current law lets taxpayers make IRA contributions regardless of account size. The proposed legislation would prohibit those with total IRA and defined-contribution plan account balances exceeding $10 million from making additional contributions to their Roth and traditional IRAs. A defined-contribution plan is a 401(k) plan or other similar workplace savings plan.

The limit would apply to single taxpayers and married taxpayers filing separately with taxable income over $400,000 ($450,000 for married taxpayers filing jointly and $425,000 for heads of household).

New Required Minimum Distributions for Large Value Aggregate Retirement Accounts

These rules would apply to high-income individuals (with the same income limits as described above), regardless of age.

• $20M/100% distribution rule. The proposed legislation would require that individuals with total retirement account balances (traditional IRAs, Roth IRAs and defined contribution plans) exceeding $20 million distribute funds from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.
• 10M/50% distribution rule. An individual with a combined balance in traditional IRAs, Roth IRAs and defined-contribution plans that exceeds $10 million at year’s end would have to withdraw at least 50% of the excess the following year. The taxpayer may take the distribution under this rule from any account.
• The 10% early-distribution penalty tax would not apply to distributions required because of the $10 million or $20 million limits.
• These rules apply to participants, owners, or beneficiaries of applicable retirement accounts. This implies that inherited IRA accounts are also combined in the total.
• These large required distributions would be separate and distinct from the annual required minimum distribution rules. The regular required minimum distribution would be taken first.

More Limited Roth Conversions

Today, taxpayers can convert all or a portion of their non-Roth IRA or defined-contribution plan accounts into a Roth IRA account without regard to the amount of their taxable income. The proposed legislation would prohibit Roth conversions for single taxpayers and married taxpayers filing separately with taxable income over $400,000 ($450,000 for married taxpayers filing jointly and $425,000 for heads of household). It appears that this proposal would not be effective until 2032.

Roth Conversions Not Allowed for Distributions That Include Nondeductible Contributions

Taxpayers who are unable to make contributions to a Roth IRA can currently make "back-door" contributions by making nondeductible contributions to a traditional IRA and then converting the contribution to a Roth IRA. Under the reform, amounts held in a non-Roth IRA or defined-contribution account cannot be converted to a Roth IRA or designated Roth account if any portion of the distribution being converted consists of after-tax or nondeductible contributions.

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