One of the key retirement provisions in the Build Back Better Act (approved by the House Ways & Means Committee on Sept. 15) targets the use of Roth IRAs by high-income individuals and/or those who have accumulated significant balances. This week we asked NAPA-Net readers to weigh in.
The Wall Street Journal highlighted the issue(s) in a recent article, “Retirement Savers Love the Backdoor Roth IRA Strategy. It Might Not Last.” A more detailed (and focused “deeper dive”) analysis by ARA Retirement Education Counsel Robert Richter appeared last week in NAPA-Net.[i] The “problem,” at least as seen by lawmakers, is simple—the solutions, as you might expect, are—well, let’s say “complicated.”
Here’s what Congress is contemplating—and what NAPA-Net Readers made of the proposals…
New RMD
One of the key provisions of the Build Back Better Act is the imposition of a new Required Minimum Distribution (RMD) for high-income taxpayers effective after Dec. 31, 2021. This new RMD (generally 50% of the value of the defined contribution accounts in excess of $10 million, as adjusted for cost-of-living increases) applies to high-income taxpayers who have aggregate account balances in defined contribution plans (i.e., qualified plans, 403(a) and (b) arrangements, governmental 457(b) plans and IRAs), over $10 million (as adjusted for cost-of-living increases (COLAs). We asked readers which one of the following they found to be most applicable in response.
37% - It’s got unforeseen circumstances.
35% - it’s more trouble than it’s worth.
12% - It’s about time.
12% - It won’t work.
4% - It will never happen.
Reader’s comments included:
This could see large selling in the equity markets.
The 50% figure seems heavy-handed. I’d prefer something closer to 20%, but I believe the intent is to both dissuade future high-income savers from accruing balances this large as well as generating tax revenue. I also think there should be another answer available which I would have selected “I’m okay with it.”
This seems punitive for individuals who have done an excellent job saving for their retirement. It presents many questions: If the goal of this rule is to get money out of retirement plans faster, why did the just raise the RMD age from 70-1/2 to 72? Is this a one-time distribution or would this “excessive saver” penalty be assessed every year? It seems to me it could pretty easily be planned around by structuring distributions between the ages of 59 1/2 and 72 to keep the aggregate balance under the $10M threshold.
Another way to penalize successful saving and investing but implemented under the envy of “it’s not fair.”
Horrible idea and they’ll bring the number down over time.
Idiotic thought process coming from lawmakers. Why retroactively penalize people that have planned for their future?
The tracking/aggregating/reporting of these account values is troublesome.
Should there be an accommodation for an eligible beneficiary’s inherited IRA?
The short answer is YES. Actually I’ve always believed in “free market economics”—i.e. Henry Hazlett’s “Economics In One Lesson.” The most efficient use of money is NOT governmental agencies, but individual(s) decision making.
Though it sounds like a good idea to raise some revenue to pay for other retirement plan enhancements (such as deferral catch-ups) given the current partisan climate and the partisan nature of the Build Back Better Act (unlike prior retirement legislation or legislation which included retirement provisions), I just don’t think that this will pass.
High income earners will divert to other tax advantaged vehicles. This is a gift to the annuity/insurance industry.
How do we, as TPA, know if the participant with $1 million in the 401(k) plan has other assets of at least $9 million? It wouldn’t be unheard of. I think required distributions would get missed, and participants have to pay the penalty, because we don’t know what’s going on outside the plan. And/or the IRA recordkeeper doesn’t know there’s also a plan. Oh wait, maybe said penalties are a revenue generator for the IRS and so part of the equation.
The objective seems laudable, but likely will not work as intended. Those with such large balances in their retirement plans will find a way around paying significant taxes. There will be seminars on how to avoid paying significant taxes. Many law firms will jump on board to assist their clients.
I always felt this method violated the spirit of the law; however, this aggregate rule is virtually worthless. A 10MM aggregate effects only a rare individual and is nothing more than a political talking point.
As a nation, we need a sound policy on how much tax revenue we need, for what, and what the best way is to raise that revenue. Dream on, right? As a general policy, I am in favor of tax breaks up to a certain extent for retirement savings. Beyond that, there is no societal good for providing this tax support. Ten million really ought to be enough for anyone. If someone thinks that’s unfair or bad policy, then tell me where we should be getting our tax revenue.
Why punish those who have saved well for their retirement and won’t be dependent on Social Security? This new regulation won’t impact many people, so I think it’s just making life more difficult.
I’m a big supporter of using tax policy to encourage socially responsible behaviors, like saving for retirement. But when savings reach a level beyond what’s necessary to fund a reasonable retirement, tax policy should no longer subsidize such savings. We can debate whether the level/approach is right, but the concept behind the proposal is unassailable.
How does any plan sponsor get the information about balances in their employees other 401ks or IRAs? A bigger question is how does the employer of Employee A obtain information about A’s spouse’s income, and balances in his/her retirement accounts? If we can’t limit Roth 401k contributions for AGI because it’s a huge invasion of privacy to ask for outside assets and spousal income/assets, this will never work.
Annual Addition Caps
Effective after 2021, high-income taxpayers would be prohibited from making “annual additions” to an individual retirement plan (i.e., a traditional or Roth IRA) for a taxable year—specifically those who, as of the close of the preceding calendar year, have aggregate vested accounts in all defined contribution plans (i.e., qualified plans, 403(a) and (b) arrangements, governmental 457(b) plans and IRAs) that exceed $10 million (as adjusted for COLAs). So, how did NAPA-Net readers “score” this one?
40% - it’s more trouble than it’s worth.
30% - It’s got unforeseen circumstances.
14% - It won’t work.
12% - It’s about time.
4% - It will never happen.
Reader comments included:
This is ridiculous! Time to look for some creative ways to do some non-qualified deferred comp savings.
Another way to penalize successful saving and investing but implemented under the envy of “it’s not fair”.. So now individuals are actually prohibited from investing/saving in qualified accounts??!!
Don’t really care, very thin air, not applicable to the overwhelming majority of working class Americans we are focused on assisting in their pursuit of financial independence. Individuals that fall into this category have plenty of resources and expertise surrounding them to ensure this doesn’t prove to be much of a factor in their financial/estate planning process.
Another horrible idea. Those taxpayers are already giving up 1/2 their income to Fed and state taxes.
Whatever happened to a free market economy? This simply represents tyranny of the elite. Ironically, many of these elites are some of the wealthiest Americans (i.e. Joe Biden, Nancy Pelosi, John Kerry—to name just a few).
Once again, for assets outside the plan how do we know? And now the plan’s getting in trouble? No thanks.
Love to see it, but there are bound to be loopholes.
This question is difficult because the concept isn’t bad, but the application of the concept would be hugely challenging. I see issues with valuation and aggregation that may not have been considered.
They are using household income and assets in this. How does an sponsor get info on their employees’ and employees’ spouse’s income and assets?
‘Back Door’ Roth Conversions
A participant in a qualified plan would no longer be able to make an after-tax contribution to the plan and then immediately roll that amount over to a Roth IRA (the mega-Roth). Likewise, an individual who is limited to making a Roth IRA contribution due to the compensation limits would no longer be able to make an after tax-contribution to a traditional IRA and then convert that amount to a Roth IRA (the backdoor Roth). Note that this prohibition would apply to all taxpayers, regardless of their income or the value of their retirement accounts. What did NAPA-Net Readers think of this?
38% - It’s got unforeseen circumstances.
26% - It’s about time.
21% - it’s more trouble than it’s worth.
8% - It won’t work.
7% - It will never happen.
This would hurt the income earns in the $200-400k range much more than and blanketing it across everyone makes little to no sense. The commonsense approach would be to stop allowing these contributions for anyone with Gross Income over $500k.
Why are we penalizing everyone? Here’s an idea... stop the congressional spending.
I also think there should be another answer available which I would have selected “I’m okay with it.”
This is just total BS
It’s been a great loophole but surprised it hasn’t been closed already
It will hurt an element of the population that isn’t the intended target.
Again, penalizing the masses when it applies to so few.
Many of the “mega-rich” they are trying to target can’t do the Mega back door Roth because of their HCE status in a qualified plan as it would cause testing issues. On the IRA side, really not talking about that much money annually to make that big a deal over. It’s already after-tax money anyway. They’ll likely try to use the “savings” to fund this behemoth bill, but they would only be able to tax the deferred growth at some unknown point down the road.
With some potential unforeseen circumstances.
Bad ideas always originate from professional politicians and government bureaucrats.
What? Who’s making these large after-tax contributions to plans and converting to Roth anyway? Wouldn’t that mess up the ACP test? I don’t know about the after-tax IRA converting to Roth—I can see that working and maybe it’s a good idea over certain dollar amounts (per year or per lifetime).
It would be sad to see this go away. This option is used by many average plan participants to avoid paying taxes on the gain in the investment in retirement. Congress is sending out mixed messages in the they love Roth in one circumstance and hate in another.
“We want you to save for retirement, but not too much and only in a way we see fit for you to save.”
I am completely against this change.
The revenue realized because of this rule would be insignificant in the overall gov’t funding. There is no reason to start slicing up who can and who can’t do certain things. If you’re eligible, you’re eligible, period.
If Congress didn’t intend for there to be such large Roth contributions and by people over a certain income, I have a problem with people exploiting a loophole to do it. Either raise the Roth limits and increase availability or shut down the loophole. Since this is a loophole being shut, I fully support it.
This measure simply corrects a tax code drafting error from a decade ago, under the Obama administration. Biggest issue is that the error remained in the code for so long that lots of employers adopted the mega-back door Roth. So fixing the problem later will be more disruptive than if it had been fixed sooner.
$10 Million Roth Conversion Cap
The bill provides an additional limitation on high-income taxpayers who have account balances that exceed $10 million. These individuals would be prohibited from electing any type of Roth conversion (i.e., in a qualified plan or in a Roth IRA). The only rollovers they would be able to make would be between designated Roth accounts and/or Roth IRAs. Which ONE of the following did NAPA-Net readers find to be most applicable?
40% - It’s more trouble than it’s worth.
33% - It’s got unforeseen circumstances.
13% - It’s about time.
7% - It won’t work.
7% - It will never happen.
I also think there should be another answer available which I would have selected “I’m okay with it.”
So now they are opposed to allowing individuals to use a planning tool that actually generates current tax revenue...
This actually surprises me. It would allow Congress to grab tax dollars today and kick the tax receipts of distributions to future years. Stunning they would prohibit tax receipts today for their bloated spending.
Again, very thin air, doesn’t apply to the vast majority of working class Americans we are working with.
I see this as a way lawmakers can raise future tax dollars to help fund the egregious spending plans.
Why would they turn off this current income stream? The government would be foregoing millions annually in taxes on Roth conversions currently…
It is possible the higher wealth individuals may not offer great 401(k) plans if they cannot get significant benefits out of the plan.
This is a strange policy shift. For the past ten or fifteen years, policy has been encouraging Roth conversions because they score well from a deficit perspective. Of course, the scoring has always been transitory. The policy change would prohibit conversions from those who are likely to generate the most revenue. I’d either prohibit all conversions (which I think would be the most sensible long-term approach) or prohibit none.
Investment Restrictions
The bill would make numerous changes to the investments that may be made in an IRA. The first restriction prohibits IRAs from investing in any security where the issuer of the security requires the investor to:
- have a specified minimum of income or assets;
- have completed a specified level of education; or
- hold a specific license or credential.
We asked readers which one of the following they find to be most applicable in response:
39% - It’s got unforeseen circumstances.
26% - it’s more trouble than it’s worth.
16% - It’s about time.
12% - It won’t work.
7% - It will never happen.
This would essentially limit IRA to invest in marketable securities only (ETF ,Mutual, Stocks, Bonds, etc.)... this would cause issues in the RE markets because investors would have to use more volatile publicly traded holdings versus non-traded RE holdings.
Brutal
I would be okay with this if the restriction applied specifically to Roth accounts. I’m all for growing pre-tax accounts as big as possible for the downstream tax revenue those great investment choices will generate.
What happens to those who met the Accredited Investor criteria and currently hold those securities in their retirement plans? Grandfathering would have to be offered. It also has a negative impact on small businesses whose owners may hold their company’s stock in their retirement account, especially those who use that strategy to raise capital at start-up.
This is insane. Now we have to monitor, above suitability, what investments Congress may deem acceptable? Here comes a day when nothing but ESG is permissible.
This is a ridiculous proposal. The Government is looking to get into the suitability assessment phase of investing, problematic all on its own.
Will have a big ripple in the marketplace.
Why? This seems silly.
This will blow up in their face.
Whatever happened to the SEC and FINRA? Don’t these agencies have a role in any of this?
None of this was part of legislation that was bipartisan, unlike Secure Act 2.0.
Well I hope it won’t happen anyway. People should be able to pick whatever investment they want in their own IRAs, even if it’s a poor choice. If they have the “requirement” they should be able to choose the investment.
This practice is pure abuse and should be stopped.
Why does the government care where people invest their money? There are already rules/regs that make sure that advisors are making recommendations that are in the best interest of the investor. It’s just more government control over something they have no business in.
I see way too many pitches for financial strategies based on abuse of the IRA rules. Not all are fraudulent/abusive, but many are. Putting up reasonable guardrails around permissible IRA investments makes sense. It might prohibit some otherwise reasonable strategies, but should limit abuse in a manner that’s reasonably enforceable.
(More) Investment Restrictions
The second change to permissible IRA investments is that the bill would prohibit an IRA to be invested in any investment where the IRA owner owns 10% or more of the entity (currently this is 50% or more) or where the IRA owner is an officer or director. Which one of the following best expressed the perspective of NAPA-Net readers on this provision?
40% - It’s got unforeseen circumstances.
28% - It’s about time.
25% - it’s more trouble than it’s worth.
5% - It won’t work.
2% - It will never happen.
I would be okay with this if the restriction applied specifically to Roth accounts. I’m all for growing pre-tax accounts as big as possible for the downstream tax revenue those great investment choices will generate.
I don’t understand the purpose of this, but they would have to grandfather existing holdings.
Why would a Govt prevent someone from investing in their own company?? Their own work?? (Don’t worry, I’m asking rhetorically.)
This will only stifle the little guy who self-funds their startup. It benefits those with access to institutional capital. There are many FedEx route owners that were able to purchase their business with 401k money after working for years as a driver. This will effectively end that.
Who’s checking this? And why not? If you want to invest in yourself you should be able to do so. Wouldn’t that make it more likely you’ll try hard to make it succeed?
This practice is pure abuse and should be stopped.
Probably ok, I’d prefer a simpler rule that prevents IRA investments in assets not valued with reasonable frequency by an independent marketplace.
This causes problems for the “eat your own cooking” rule. While people should diversify, outsiders watch for this.
SOL Limitations
The current 3-year statute of limitations for any substantial errors (willful or otherwise) relating to the reporting of the valuation of IRAs would be extended to 6 years. Similarly, the statute of limitations would be extended to 6 years for any taxes due to an IRA losing its tax-exempt status. What did NAPA-Net Readers think?
37% - it’s more trouble than it’s worth.
31% - It’s about time.
26% - It’s got unforeseen circumstances.
5% - It won’t work.
2% - It will never happen.
Sometimes it takes a while to find out what went wrong, and some extra time on both sides could be beneficial.
Most of these proposals are a reaction to the articles on mega backdoor Roths this summer. However, I’m okay with most of the proposals. The proposals seem to try and address the issue of “fairness” and taking some action toward the inequality challenges facing the country. Our efforts as an industry still need to focus on the millions of American workers who don’t have a plan or are not participating in a plan. The proposals are a small issue affecting few retirement savers and feels like a distraction from our real efforts of helping everyday Americans save for retirement.
Thanks to everyone who participated in our weekly NAPA-Net Reader Radar poll!
