Ed Slott Weighs In on House Democrats' Proposed Mega-IRA Crackdown

Backdoor Roth IRA Curbs for High Earners

In order to close so-called "backdoor" Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for 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 households with taxable income over $425,000 (all indexed for inflation).

"This is similar to the old $100,000 income limitation for Roth conversions that existed before 2010, except now the income limits are increased to the $400,000/$450,000 levels," Slott explained. "Oddly though, this proposal would not be effective for 10 years. The effective date says this would apply in years after Dec. 31, 2031."

This change "would end Roth conversions for high-earners, but Congress still wants its conversion tax dollars. What to do?" Slott continued. "Maybe this delayed effective date shows us that Congress still needs this Roth conversion revenue so it can fill budget gaps, at least for the next 10 years. So, this provision is a non-issue for now."

Elimination of Mega Backdoor Roth

This section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth IRAs regardless of income level, effective for distributions, transfers and contributions made after Dec. 31, 2021.

The plan "would be an all-out ban on backdoor Roths from IRAs and mega backdoor Roths from plans, regardless of income," Slott said. "At least this inadvertently finally answered the question of whether backdoor Roths are legal. They obviously are, because if they weren't Congress would not need to end them."

Restriction on IRA Investments

The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential, Slott said.

"For example, the legislation prohibits IRAs from holding investments which are offered to accredited investors because those investments are securities that have not been registered under federal securities laws. IRAs holding such investments would lose their IRA status.

"This is a direct hit on Peter Thiel (who already did this) and other would-be Thiels with certain knowledge and opportunities that other run-of-the mill investors/savers would not have," Slott explained. "This seems fair as a way of leveling the playing field for all investors."

Expansion of IRS Limitations Period

The bill expands the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from three years to six years.

"Again, this is a provision created in the wake of Peter Thiel's $5 billion Roth IRA and the questions surrounding a proper valuation," Slott said. "This will give IRS more time to review these valuations well beyond the traditional 3-year statute of limitations."

Tightening Up Self-Dealing Rules

"To prevent self-dealing, under current law prohibited transaction rules, an IRA owner cannot invest his or her IRA assets in a corporation, partnership, trust, or estate in which he or she has a 50% or greater interest," Slott explained.

However, he continued, "an IRA owner can invest IRA assets in a business in which he or she owns, for example, one-third of the business while also acting as the CEO. The bill adjusts the 50% threshold to 10% for investments that are not tradable on an established securities market, regardless of whether the IRA owner has a direct or indirect interest. The bill also prevents investing in an entity in which the IRA owner is an officer."

Pictured: Ed Slott