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Restrictive Retirement Guidelines Nearer For The Wealthy As Home Adopts $ 1.75 Trillion Biden Plan

U.S. House Speaker Nancy Pelosi (D-CA) speaks during a press conference following the passage of the Build Back Better Act at the U.S. Capitol in Washington, Nov. 19, 2021.

Al Drago | Reuters

The House of Representatives passed law on Friday to restrict the use of retirement plans by wealthy Americans.

The new rules are part of a major tax law reorganization tied to the $ 1.75 trillion Build Back Better Act, the largest expansion of the social safety net in decades and the largest effort in US history to combat it Would represent climate change.

The Democrats in the House of Representatives passed the bill along the party lines, 220-213. Now it goes to the Senate.

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Wealthy individuals with retirement savings of more than $ 10 million would have to draw their accounts in a new type of minimum required distribution (RMD) each year. Lawmakers would also close "back door Roth" tax loopholes, primarily used by the wealthy, and prohibit further contributions to individual retirement accounts once those accounts exceed $ 10 million.

The measures aim to curb the use of 401 (k) plans and IRAs as tax havens for the rich.

They – along with tax regulations for businesses and households making more than $ 400,000 a year – also increase revenue for general Pre-K, Medicare expansion, renewable energy loans, affordable housing, extended tax breaks for a year Kids and big Obamacare grants.

The pension proposals were included in a first House tax proposal in September. However, the White House removed retirement plan rules from an October 28 legal framework after lengthy negotiations with opposed Democratic Party members who were concerned about some taxes and other elements of the package.

However, some of the earlier retirement proposals did not reappear in the new iteration.

For example, the original legislation would have banned IRA investments such as private equity, which would have to be owned by so-called "accredited investors," a status tied to wealth and other factors. And some of the rules the House passed on Friday would go into effect years later than originally proposed.

Legislation can still change in the Senate, where the united Republican opposition means that the Democrats cannot afford to lose a single vote for the measure's success.

RMDs for $ 10 million accounts

Currently, RMDs for Account Holders are age-not tied to wealth. Roth IRA owners are also not subject to these distributions under applicable law. (One exception: inherited IRAs upon death.)

House legislation would complement these rules and require wealthy savers of all ages to withdraw a large portion of total retirement assets annually. You would potentially owe income tax on the funds.

The formula is complex and based on factors such as account size and account type (pre-tax or Roth). Here's the general premise: account holders must withdraw 50% of accounts worth more than $ 10 million. Larger accounts must also consume 100% of the Roth account size over $ 20 million.

The distributions would only be required to those whose income exceeds $ 400,000. The threshold would be $ 450,000 for married taxpayers and $ 425,000 for heads of household.

The provision would begin after the last available legislative summary after 12/31/2028. (In the House's September proposal, it would have started after December 31, 2021.)

Backdoor Roth

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Roth IRAs are particularly attractive to wealthy investors. Investment growth and future withdrawals are tax-free (59½ years and older) and no withdrawals are required by the age of 72 as is the case with traditional pre-tax accounts.

However, there are income limits for contributing to Roth IRAs. In 2021, single taxpayers cannot save all at once if their income exceeds $ 140,000.

But current law allows high-income individuals to save through "back door" contributions in a Roth IRA. For example, investors can convert a traditional IRA (that has no income limit) into a Roth account.

Current law also allows "mega-backdoor" contributions to a Roth IRA using after-tax savings in a 401 (k) plan. (This process allows the rich to convert much larger sums of money, as 401 (k) plans have higher annual savings limits than IRAs.)

House legislation would address both.

First, it would prohibit all after-tax contributions in 401 (k) and other workplace plans and IRAs from being converted into Roth savings. This rule would apply to all income levels from December 31, 2021.

Second, savers on IRAs and company retirement plans might not be able to convert input tax into Roth savings if their taxable income exceeds $ 400,000 (individuals), $ 450,000 (married couples), or $ 425,000 (heads of households). It would start after December 31, 2031.

IRA contribution limits

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

However, legislation would prohibit individuals from making more contributions to a Roth IRA or a traditional IRA if the total value of their combined retirement accounts (including workplace plans) exceeds $ 10 million.

The provisions of this section also apply to tax years beginning after December 31, 2028. (Like the RMD provisions, they would have started after December 31, 2021 in Parliament's proposal of September.)

The rule would apply to single taxpayers once income exceeds $ 400,000; married couples over $ 450,000; and Heads of Households over $ 425,000.

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