“Mega” IRAs Are Still Targeted
The Individual Retirement Account was originally created to provide a mechanism for tax-favored retirement savings for workers who were not already covered by an employer’s retirement plan. Over the years the IRA has grown in importance as a retirement planning asset, in particular as a receptacle for lump-sum retirement plan distributions to preserve tax benefits (the “IRA Rollover”). According to the Investment Company Institute’s 2021 Fact Book, some $12 trillion was invested in IRAs as of 2020.
A fortunate few taxpayers have been able to accumulate IRAs and Roth IRAs in excess of $10 million, some 2,569 according to a July 2020 analysis by the nonpartisan Congressional Joint Committee on Taxation. Two factors account for such remarkable good fortune. The first is that the contribution limits for employer plans, such as 401(k) plans, are far higher than for IRAs. Such plans typically offer lump sum distribution options, and those are likely eventually to become large IRA Rollovers. The second factor is privileged access to investments poised to explode in value, such as initial public offerings.
There have been three versions of the Build Back Better Act considered by the House of Representatives this year. The first version included a “crackdown” on mega IRAs, the second did not, and the IRA changes returned with critical modifications in the third version, which was passed by the House and is before the Senate as of December 2021.
The most important takeaway is that the most important changes in the House-passed version of the bill don’t take effect until 2029. Briefly, the key elements are:
New contribution limits. High-income taxpayers with aggregate IRA accounts worth more than $10 million would not be allowed to make further contributions.
New minimum distribution requirements. Those with IRAs exceeding $10 million would have to receive large minimum distributions with the aim of bringing the total down. Ordinary income tax would apply, but penalties for premature distributions would not. This rule and the new contribution limit would take effect after December 31, 2028.
Limits on “backdoor Roths.” Strategies for getting around the restrictions on who may contribute to a Roth IRA would be ended effective in 2022.
Information reporting. Plan administrators would be required annually to report to the IRS all account holders or beneficiaries with a balance of at least $2.5 million. This also would take effect in 2029.
Given that the new restrictions apply only to owners of more than $10 million in IRA assets, why the much lower reporting threshold of $2.5 million? Perhaps because the JCT report said that there were 21,682 taxpayers with IRAs worth between $5 million and $10 million. That group had $137 billion in traditional IRAs, $14 billion in Roth IRAs—that may prove to be a tempting target for a future Congress.
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