The Retirement Plan Impacts of the Build Back Better Bill

December 14, 2021 | Article

By Ava Archibald, EA and Melissa White, CPA, AEP®

How the New Reconciliation Bill Targets Certain Retirement Account Contributions and Distributions

The Build Back Better bill, passed by the House of Representatives in mid-November, includes proposed modifications to the retirement savings plans of higher income individuals. The proposed changes could have significant consequences for contributions to and distributions from Individual Retirement Accounts (IRAs) and other qualified retirement plans depending on an individual’s taxable income or for those with combined retirement account balances over $10 million.

If the bill is passed as currently written, here is what it could mean for your retirement savings.

Prohibit future contributions to individual retirement plans if the combined value of an individual’s traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceeds $10 million.

The proposal would create new rules for those with large IRA and other applicable retirement plan balances. Specifically, it would prohibit additional contributions for a taxable year if the total value of an individual’s IRA and applicable retirement plan balances exceeds $10 million at the close of the preceding calendar year.

The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation after 2028). This provision would be effective for taxable years beginning after 2028.

Require minimum distributions of the greater of 50% of the excess of the aggregate balance in IRAs and defined contribution plans and 100% of the excess above $20 million.

If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income meets the same thresholds as noted above (e.g., $450,000 for a joint return). The minimum distribution generally would be 50% of the amount by which the individual’s prior year aggregate traditional IRA and defined contribution account balance exceeds the $10 million limit.

Further, if the combined account balance exceeds $20 million the minimum distribution amount would equal 100% of the combined balance that exceeds $20 million. This provision would be effective for taxable years beginning after 2028.

Prohibit the conversion of after-tax contributions in qualified plans and IRAs to Roth accounts after 2021.

The proposal would prohibit after-tax IRA and plan contributions from being converted to Roth accounts, regardless of income level. This would eliminate the backdoor Roth IRA conversion and Mega backdoor Roth IRA conversion strategies. This provision would be effective for distributions, transfers, and contributions made after 2021.

Prohibit the Roth conversion of IRAs and employer-sponsored plans for taxpayers over certain taxable income limits.

The bill would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000 (or taxpayers married filing separately), married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation after 2028). This provision would be effective for taxable years beginning after 2031.

IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules. The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner or IRA beneficiary is always a disqualified person.

What You Can Do Now

The Build Back Better bill is awaiting action by the U.S. Senate where its future is not certain. However, if you traditionally make a backdoor Roth contribution after year-end but before the due date of your tax return, it would be advisable to consider making the contribution before December 31, 2021, in the event the legislation is advanced and backdoor Roth contributions are no longer permitted after 2021. The other potential changes to IRAs and retirement plans should also be monitored, and if these changes become law, taxpayers may need to meet with their advisor to modify their retirement strategies.

Find out how the impending legislation may affect you.

This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.

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