House Democrats are proposing new rules for the retirement plan for the rich

House Democrats on Monday proposed a series of changes to the rich’s retirement accounts, which were part of a restructuring of the tax code tied to a $ 3.5 trillion budget plan.

Taken together, Democrat reforms aim to erode the use of retirement accounts as tax protection for the rich and instead promote them as a way for low- and middle-income Americans to build a ou niu.

Most of the changes would begin in 2022.

Wealthy people with retirement accounts in excess of $ 10 million would be prohibited from making additional savings and would have a mandatory new minimum distribution each year, according to a tax bill presented Monday by the House Ways and Means Committee.

The bill would also repeal so-called Roth conversions into individual retirement accounts and 401 (k) type plans for those earning more than $ 400,000 a year. It would also prevent savers from using the so-called “mega Roth backdoor” strategy, regardless of income level.

In addition, legislation would prohibit individual retirement accounts from having investments that require buyers to be accredited investors, a status generally reserved for wealthy investors.

The proposals are part of a broader theme of raising taxes on those earning more than $ 400,000 a year to help pay for education, climate, paid leave, childcare and other measures, at the same time they make the tax code more equitable.

They also follow the Democrats ’claim after a recent ProPublica report that Peter Thiel, co-founder of PayPal, owns a Roth IRA that had grown to $ 5 billion in 2019, from less than $ 2,000 in 1999.

“The IRAs were designed to provide retirement security for middle-class families, not to allow the super-rich to avoid paying taxes,” Sen. Ron Wyden, chairman of the Senate Finance Committee, said in July. following a data release showing “mega” IRA growth.

Democrats have narrow margins to pass a bill, which they intend to do with a simple majority through a budget conciliation maneuver.

Republicans remain firmly opposed. Representative Kevin Brady, a member of R-Texas, and a senior member of the Forms and Means Committee, defined the expense as the “largest expansion of the welfare state of our lives” during a hearing Thursday, saying that “wastes heavily earned tax dollars.” . “

Current legislation allows taxpayers to make contributions to the IRA regardless of account size.

However, the legislation would prohibit people from making more contributions to a Roth IRA or a traditional IRA if the total value of their combined IRA and defined contribution plan exceeds $ 10 million. (A defined contribution plan is a 401 (k) plan or other similar workplace savings plan.)

The goal of the policy would be to “avoid subsidizing retirement savings once account balances reach very high levels,” according to a general proposal.

This limit would apply to single taxpayers with more than $ 400,000 in taxable income. The threshold would be $ 450,000 for married taxpayers filing jointly and $ 425,000 for heads of households.

People with a traditional IRA, a Roth IRA, and a defined contribution retirement account that exceeds $ 10 million by the end of the year should withdraw at least 50% of the excess the following year.

Those with an account in excess of $ 20 million must first exit the Roth IRA and 401 (k) plans.

These new mandatory minimum distributions for mega IRAs will only be required for savers whose taxable income exceeds the same thresholds previously identified for contribution limits.

There are income limits for contributing to Roth IRAs. In 2021, lone taxpayers cannot add money to these accounts if their income exceeds $ 140,000.

But current legislation allows for “back door” contributions to the Roth IRA. This can be achieved by converting a traditional IRA or Roth 401 (k) account, which carries no income limits. (There are income limits that determine whether or not traditional IRA contributions are deductible).

Savers pay taxes for conversions, but their future investment growth and retirement distributions are tax-free.

The legislation would put an end to the Roth IRA strategy of the back door by eliminating Roth conversions for both IRAs and workplace plans, such as 401 (k) plans.

The policy would apply to the same income thresholds listed above. It will be accounted for for distributions, transfers and contributions made in taxable years as of December 31, 2031.

The so-called “mega Roth back door” strategy uses a principle similar to Roth’s back door.

The strategy saves up to $ 58,000 on a 401 (k) plan, more than the traditional $ 19,500 contribution limit, through a 401 (k) after-tax deposit rate. Savers then turn that savings into a Roth account, which in turn generates the benefit of tax-free investment growth.

Democrat legislation would end Roth’s mega gate by banning all after-tax contributions to work plans and prohibiting the conversion of IRA after-tax contributions to a Roth account.

This policy would apply to everyone, regardless of income level.

Democrat law would prohibit IRA investments that require the homeowner to have a minimum level of assets or income, or to have completed a minimum level of education, or to have obtained a specific license or credential.

This would apply, for example, to accredited investors who want to buy a private investment.

IRAs with these investments would lose their IRA status, meaning they would lose their tax benefits.

These rules would apply from 2022, but there would be a two-year transition period for IRAs that already had these investments.