Page 36 - Investment Advisor - October 2021

COVER STORY

What to Make of the Democrats’ Latest Tax Plan

ouse Ways and Means Committee Tax
HChairman Richard Neal’s mid-Sep- Planning
tember plan to usher in several changes Financial Portfolio Retirement Social Trusts & Estates
to individual retirement accounts “will Planning Construction Planning Security
not likely see much pushback because
most people will never have to worry
about their IRA balances exceeding $20
million,” said IRA and tax specialist Ed
Slott of Ed Slott & Co. “And the few
who do will easily move on to the next
workaround that Congress has not yet
thought of.”
Committee Chairman Neal’s plan
prohibits taxpayers from contribut-
ing to their IRAs once their account
balance exceeds $10 million, increases
the required minimum distributions
for high-income taxpayers with large
balances and eliminates so-called “backdoor” Backdoor Roth IRA Curbs for High Earners
Roth IRA strategies for certain taxpayers. To close so-called “backdoor” Roth IRA strate-
Slott offered the following insight on the Ed Slott gies, the bill eliminates Roth conversions for both
Massachusetts Democrat’s planned changes to IRAs. IRAs and employer-sponsored plans for single tax-
payers (or taxpayers married filing separately) with
Limit on IRA Contributions for Mega-IRAs taxable income over $400,000, married taxpayers filing jointly
Neal’s plan prohibits further contributions to a Roth or tra- with taxable income over $450,000, and heads of households
ditional IRAs for a taxable year if the total value of an indi- with taxable income over $425,000 (all indexed for inflation).
vidual’s IRA and defined contribution retirement accounts “This is similar to the old $100,000 income limitation for
generally exceed $10 million as of the end of the prior taxable Roth conversions that existed before 2010, except now the
year. This limit would apply to taxpayers with income in income limits are increased to the $400,000/$450,000 levels,”
excess of $400,000 (single), or $450,000 (married-joint). Slott explained. “Oddly though, this proposal would not be
“This seems sensible, but I don’t see this making that much effective for 10 years. The effective date says this would apply
of a difference to anyone with over $10 million in their retire- in years after Dec. 31, 2031.”
ment accounts,” Slott said. “For example, the maximum IRA
(or Roth IRA) contribution for 2021 is only $6,000 (and $7,000 Elimination of Mega Backdoor Roth
if 50 or over). Plus, there is no such restriction in the proposal This section prohibits all employee after-tax contributions in qual-
for limits to 401(k) contributions where these same people ified plans and prohibits after-tax IRA contributions from being
could still contribute up to $19,500 to a company plan (or up converted to Roth IRAs regardless of income level, effective for
to $26,000 if age 50 or over).” distributions, transfers and contributions made after Dec. 31, 2021.
The plan “would be an all-out ban on backdoor Roths from
RMD Hikes IRAs and mega backdoor Roths from plans, regardless of
If an individual’s combined traditional IRA, Roth IRA and income,” Slott said. “At least this inadvertently finally answered
defined contribution retirement account balances generally the question of whether backdoor Roths are legal. They obvi-
exceed $10 million at the end of a taxable year, a minimum ously are, because if they weren’t Congress would not need to
distribution would be required for the following year. This end them.”
RMD would be 50% of the balance above $10 million, and this
provision would apply to those with incomes over the same Restriction on IRA Investments
limits as above ($400,000/$450,000), Slott explained. “This is a direct hit on Peter Thiel (who already did this) and
In addition, if combined retirement account balances other would-be Thiels with certain knowledge and opportu-
exceed $20 million, then the excess over $20 million must be nities that other run-of-the mill investors/savers would not
distributed from Roth accounts (Roth IRAs and company plan have,” Slott explained. “This seems fair as a way of leveling the
Roth accounts). playing field for all investors.”

34 INVESTMENT ADVISOR OCTOBER 2021 | ThinkAdvisor.com