Democrats Have A Plan To Change Retirement Account Rules In 6 Ways

As Congress continues to hammer out the details of the multi-billion-dollar infrastructure spending package, the potential impact on American retirement plans is becoming clearer.

While much of the ongoing work on the legislation focuses on tax provisions that are unlikely to affect the average person in or approaching retirement, certain changes are more likely to affect retirement accounts as soon as next year.

Based on a summary released this week by the House of Representatives, here’s a look at current proposals in the Build Back Better Act that would affect IRAs, 401(k) plans, and other types of retirement accounts.

For high-earners, there will be no more Roth conversions.

Converting a traditional IRA to a Roth IRA is one strategy for avoiding future taxes; in essence, you pay taxes on the converted amount up front and then avoid paying taxes on future withdrawals as long as you follow IRS IRA rules.

However, in its current form, the new bill would exclude some taxpayers from this option.These organizations would no longer be able to convert IRAs or employer-sponsored plans like 401(k)s to Roth accounts if the bill became law.

  • Single filers who earn more than $400000 in taxable income per year
  • Those who are married and have taxable income in excess of $400,000.
  • Couples filing jointly with taxable income of more than 450000
  • Heads of households with an annual taxable income of more than 425000

These figures would be inflation-indexed, which means they would rise over time.

This provision would go into effect in the fiscal year 2032.

There will be no more Roth conversions for post-tax contributions.

The bill also prohibits the conversion of the following to a Roth IRA:

  • All after-tax contributions to qualified plans made by employees
  • Contributions to an IRA after taxes

This provision, which would take effect in 2022, would apply to anyone who makes after-tax contributions, regardless of their income level.

Self-interested IRA investments are being targeted.

Self-dealing is prohibited under current law, which prohibits IRA owners from investing their funds in corporations, partnerships, trusts, or estates in which they own a 50% or greater stake.

This bill would lower that threshold to 10% and make it more difficult to invest in companies in which you have a significant stake in other ways.

Although there is a transition period for people who already own this type of investment, this change will generally take effect for the 2022 tax year.

For high-value workplace retirement plans, there is now a new reporting requirement.

The bill would impose a new annual reporting requirement for defined-contribution plans with total account balances of more than $250,000, such as 401(k) and 403(b) plans.5 million dollars

An affected plan participant’s balance (that is, the employee covered by the plan) would be reported to both the IRS and the participant.

This change would take effect in the tax year 2022.

High-earners with large balances now have a new contribution limit.

Another section of the new bill would prevent contributions to Roth and traditional IRAs if the total value of your IRA and defined-contribution accounts was more than $10 million at the end of the previous taxable year.

This restriction would be imposed on

  • Single filers who earn more than $400000 in taxable income per year
  • Those who are married and have taxable income in excess of $400,000.
  • Couples filing jointly with taxable income of more than 450000
  • Heads of households with an annual taxable income of more than 425000

These income thresholds would be indexed to inflation, just like the Roth conversion rules for high-earners.

This modification would go into effect in 2022.

RMDs for high-earners with large balances have been updated.

Generally, you must begin taking required minimum distributions (RMDs) from your retirement accounts at the age of 72.This amount is determined by an IRS formula that takes into account your account balance as well as your life expectancy.

People with combined IRA and defined-contribution account balances of more than $10 million at the end of a taxable year and income exceeding the thresholds above would be subject to a new RMD under the changes proposed in this bill, regardless of their age.

This RMD would be equal to half of the amount by which their combined balance exceeds ten million dollars.The RMD would be 50000 if the total balance was 10100000, which was 100000 more than the 10 million limit.

For combined balances of more than $20 million, a higher RMD would be required.

What about retirement benefits?

If you have a defined-benefit plan, such as a traditional pension, you can relax for the time being.

The summary of the retirement account provisions of the Build Back Better Act released this week makes no mention of defined-benefit plans, so none of the above changes appear to apply to traditional pensions.

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