As promised, we have been following developments in proposed tax changes and we are committed to keeping you updated.
Previously, we covered the ways the bill proposed by the House Ways and Means Committee affects you, your business and your estate plan. As promised, today we will dive into how the bill affects your retirement plan.
Please note, these changes are not yet law. We will continue to monitor proposals as they make their way through the legislative process.
While previous legislation on retirement plans expanded access and enhanced security for Americans, the proposed bill focuses more on generating tax revenue. To do so, it would impose a few key restrictions and limitations on retirement accounts beginning with the new year. Here is a brief summary of the most impactful changes included, and how they could affect your retirement plan.
- Limiting contributions
Under current law, individuals who meet certain eligibility requirements can contribute up to $6,000 (or $7,000 for those over 50) to an IRA or Roth IRA. Proposed legislation would prohibit additional contributions for years where adjusted gross income exceeds $400K/$450K for single and married filing jointly respectively, and prohibit cumulative balances in defined contribution accounts from exceeding $10M as of the end of the prior tax year. These changes would be effective in 2022.
- Increase Required Minimum Distributions (RMDs)
The proposed bill would impose a new RMD on individuals with over $10M in retirement accounts and taxable income over $400K/$450K for single/MFJ filers. Under these provisions, a distribution would be required for 50% of the prior year aggregate account balance exceeding $10M. If the aggregate account balances exceed $20M, Roth accounts would have to be distributed first until the aggregate account balances fell below $20M or Roth balances were $0. These changes would be effective in 2022.
- Limiting Roth conversions
For over a decade we have enjoyed limitless conversions on Roth accounts. Anyone, regardless of income levels, can convert any amount of assets from IRA to Roth IRA accounts. Starting in 2032, this bill would eliminate Roth conversions in any year taxable income exceeds $400K/$450K.
- Closing the "back door"
A popular retirement planning tool, "back-door" Roth conversions, would come to an end under proposed legislation. While there have always been income limitations on Roth IRA contributions, you could still contribute after-tax dollars to an IRA and then execute a Roth conversion to get the money into a Roth account. Starting in 2022, the proposed bill would disallow converting or rolling after-tax contributions into Roth accounts. Tax-deferred dollars would still be eligible for conversion.
- Limiting certain investments in IRAs
Traditionally, certain self-dealing transactions, as well as investments into collectibles and life insurance have been prohibited for IRAs. The new provision would expand these limitations to include any investments that require the IRA owner to obtain a certification, meet a minimum asset level, or obtain a level of education, in essence ending investments for only accredited investors in IRAs. This is proposed to go into effect in 2022, but includes a two-year grace period to address any existing issues.
- Limiting self-dealing transactions
An IRA owner cannot invest IRA assets into an entity which they hold an interest of 50% or more. The new bill proposes bringing this limit down to 10% when investing in an entity not traded on an established securities market. This provision would also be effective in 2022 with a two-year grace period to address any existing issues.
We are here for you
Remember, this is only a summary of changes which may pass. We anticipate many changes before the bill is finalized and voted upon. As always, we will continue to provide the most up-to-date information. If you have any questions on concerns, please do not hesitate to reach out to your M&S Tax Advisor as soon as possible.
As things continue to evolve, we will be here to guide you through any changes or questions. Our office has started to reopen. All clients can now safely join us in person, if desired. We will also continue to offer remote meeting options. We will ensure your tax planning needs are met on a timely basis