Prep Your Clients for 2 Bills That Could Change IRAs in 2022

While Congress says they don't want high-income people converting, they still want and need the Roth conversion revenue these large conversions bring in to balance their 10-year budget windows. So, have clients take advantage of this open window starting in 2022.

This shows us that Congress secretly loves Roth IRAs because it is addicted to the revenue they generate. It remains to be seen if they will ever really want to make them less valuable by adding restrictions or trying to tax them in some form. That would just kill their golden goose.

You can tell clients not to worry too much here. Congress got obsessed with Peter Thiel and his $5 billion Roth IRA, which was perfectly legal.

In fact, the Secure 2.0 bill includes "Rothification" provisions to increase Roth participation.

Large Retirement Accounts and High-Income Provisions 

These provisions in the BBB Act would affect those with combined retirement account balances exceeding $10 million and whose income exceeds the $400,000/$450,000/$425,000 thresholds that apply to the Roth conversion provision ban above.

The $10 million combined balance includes all IRAs, Roth IRAs, inherited retirement accounts, and all defined contribution company plans (but not defined benefit plans).

For those in this group, future IRA contributions would be prohibited. But oddly, 401(k) and other company retirement plans are unaffected, and they allow larger contributions.

Mega RMDs

The provision would require 50% RMDs over $10 million in combined retirement plan balances, and 100% RMDs for over $20 million. These RMDs would be regardless of age and would diminish Roth IRAs first.

Tell clients that if they meet these balance and income provisions, they do not have to worry just yet. Under the most current version of BBB (December 2021), these provisions would not be effective until 2029. But even so, it's good to look down the road and see which clients could be approaching these levels by then. It may be more than you think.

A client with combined retirement balances of, say, $5 million today might easily reach the $10 million limit by 2029.

If you have clients who are close to these amounts, don't keep adding to these accounts, especially to already large Roth IRAs, which seem to be a target of Congress.

Instead, have clients use permanent life insurance as a tax-free savings and wealth-transfer vehicle. Life insurance will also be more effective for estate plans and trusts since the Secure Act eliminated the stretch IRA for most non-spouse beneficiaries.

And use regular taxable accounts where accrued lifetime appreciation can be passed to beneficiaries income tax-free with the step-up in basis. IRAs and other retirement accounts never get a step-up in basis, so they will be less valuable for estate planning purposes.

Note that with all the talk about eliminating step-up in basis for the past year, it was not included in the latest version of any of these bills and will not be eliminated in the near future. The step-up in basis provision is too entrenched in tax law (since 1921), and every attempt to kill it for the past 100 years has been unsuccessful.

That's because in the end, it affected too many unintended targets, like the so-called one-year millionaires who sold a home or business with large gains.

The Securing a Strong Retirement Act of 2021, aka 'Secure 2.0′

With all the tax legislation oxygen taken up by BBB, many have forgotten about Secure 2.0, but it's still waiting to see the light of day.

Keep an eye on this bill. Of all the the bills that could be enacted in 2022, this one has the best chance, having passed out of committee unanimously, with full bipartisan support. See which clients may be affected by these proposals in 2022:

'Rothification'

Secure 2.0 includes provisions allowing both SIMPLE and SEP Roth IRAs. In addition, plan catch-up contributions would be required to be made to Roth plan accounts, and plans could allow participants to have employer matching contributions made as Roth contributions.

Other Proposed Changes 

• Increasing the age at which RMDs begin over time from 72 to 75.
• Indexing $1,000 IRA catch-up contributions for inflation.
• Increasing the limit on catch-up contributions to 401(k)s and other plans for individuals who have attained age 62, 63 or 64.
• Allowing matching contributions on student loan payments.
• Eliminating the requirement that premiums for qualifying longevity annuity contracts be limited to 25% of an individual's account balance. (Note: For 2022, the QLAC limit has increased from $135,000 to $145,000, based on IRS inflation-adjusted increases.)
• Reducing the penalty for failure to take RMDs from 50% of the shortfall to 25%.
• Expanding the IRS self-correction program (EPCRS) to include IRAs.
• Indexing the $100,000 qualified charitable distribution limit to inflation and allowing a once-in-a-lifetime QCD to a split-interest entity such as a charitable remainder unitrust.
• Expanding the age 50 exception to the 10% early distribution penalty to private-sector firefighters.
• Changing the rules for when the statute of limitations begins for the excise tax on excess IRA contributions.
• Limiting the repayment of qualified birth or adoption distributions to three years.
• Allowing penalty-free withdrawals from IRAs and retirement plans for individuals in cases of domestic abuse.
• Limiting the loss of tax-deferred treatment to the portion of an IRA that is involved in a prohibited transaction.

Don't Forget Beneficiary Forms

And … as always, check and update beneficiary forms for all retirement plans. Make this a priority for all clients. Tax law changes and life transitions may require updating existing plans. This is the one area where the most expensive mistakes happen, and these oversights often cannot be fixed.

You see, there's plenty to talk about with clients for 2022. Start adding value to your conversations, and have a happy new year!

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Ed Slott, CPA, America's IRA expert, is a nationally recognized speaker, television personality and author known for turning advanced tax strategies into understandable, actionable and entertaining advice. He was named "The Best Source for IRA Advice" by The Wall Street Journal.

Slott is a professor of practice at The American College of Financial Services and has been recognized by leading industry organizations for his significant thought leadership and contributions. He is one of the top pledge drivers of all time with his popular public television specials and the creator of Ed Slott's Elite IRA Advisor Group.

He most recently published the updated book, "The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes and Combat the Latest Threats to Your Retirement Savings" (Penguin Random House, 2021).