ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in California involved a question on President Biden’s 2024 Budget. The advisor asked: “I heard the 2024 Budget for the U.S. contains some restrictions on retirement savings and Roth conversions. Can you explain the provisions and when they take effect?”
Highlights of Discussion
Let’s start with the second half of your question first—when do the provisions take effect? The federal budget contains estimates of federal government income and spending for the upcoming fiscal year (October 1 through September 30) and includes suggestions or proposals—not laws—on how to achieve income and spending goals. Consequently, while there are recommended effective dates tied to the provisions of the budget, nothing has been enacted. The provisions are merely suggestions. The president’s release of the budget to Congress is an early step in the entire budget process.
That said, the budget does reflect what is on the Administration’s mind, and the retirement proposals are ones that are recurring themes (e.g., included in the 2021 “Build Back Better” bill). The related General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals includes a description of “modifications to rules relating to retirement plans.”
Among other items, the budget suggests imposing $10 million and $20 million caps on savings in tax-favored retirement accounts for “high income taxpayers,” and requiring distributions of a portion of the excess based on the applicable cap.
A high-income taxpayer would be someone with gross income over:
- $450,000, if the taxpayer is married and filing jointly (or is filing as a surviving spouse); or
- $425,000, if the taxpayer is a head-of-household; or
- $400,000, in other cases.
High-income taxpayers with accumulations of more than $10 million would be required to distribute 50 percent of the excess amount, and if accumulations exceeded $20 million, then the required distribution would be the lessor of the excess or all Roth accumulations.
Second, plan administrators of a tax-favored retirement arrangement would be required to report to the Treasury Secretary any vested account balance of a plan participant or beneficiary that exceeds $2.5 million.
Third, certain Roth conversions would be eliminated for high-income taxpayers (as described above).
While action on these initiatives is not expected this year, targeting large retirement account balances has some populist appeal, and has had the support of Democrat policymakers for some time. The idea of capping retirement accumulations is likely to persist beyond the next election.
The president’s budget proposal, containing suggestions on how to achieve income and spending goals, is an early step in the budget process. None of the budget’s provisions are law at this point. But several themes targeting excessive retirement savings in the budget reflect the current focus of the Administration and are likely to be points of discussion and debate in Congress.