President Biden, who has never pulled punches about his desire to increase taxes on the wealthy, has proposed a 2025 budget that would substantially hike taxes on wealthy taxpayers who hold large IRAs and push back against high-dollar backdoor Roth conversions.
Biden’s budget proposal seeks to subject any assets in excess of $10 million in tax-deferred and tax-free retirement accounts to RMDs, said Garrett Watson, senior policy analyst at the Tax Foundation, a Washington, D.C., think tank.
The president wants to require wealthy account holders to annually withdraw RMDs of 50% of any IRA assets in excess of $10 million, regardless of the account holder’s age. Under current law, IRA holders must take a required minimum distribution (RMD) every year after turning age 73.
In addition, there would be a new $20 million limit on IRA assets, with a requirement that any amount above that level would have to be withdrawn from the IRA, exposing the assets to taxes. The budget also aims to slam the door on backdoor Roth IRA conversions for higher earners, corporations and folks earning more than $400,000 a year, or $450,000 for married couples, while expanding tax credits and other relief for lower-income taxpayers.
The proposed changes would create a windfall for the U.S. Treasury because withdrawals from regular IRAs are subject to income tax, which maxes out at 37%. That top rate could increase to 39.6% in 2026, according to the Tax Cuts and Jobs Act’s sunsetting provisions.
As with any proposed tax that targets accumulated wealth, Biden’s proposals are controversial, but they’re not new, Watson said.
Variations of the IRA RMD and balance limit proposal go back to September 2021, when some members of Congress grew concerned about media reports about billionaires with very large IRA balances. “The idea was to find a way to limit these accounts using RMDs and taxation,” said Watson.
The measures were in Biden’s Build Back Better legislation before they were removed and “he’s included them in his budget proposals ever since. This is something we’ve been watching, which hasn’t gotten much traction,” Watson said.
House Democrats also proposed almost identical legislation in September 2021 that would have required taxpayers with retirement assets of more than $10 million to draw down those funds each year.
News about the fat IRAs accumulated by some billionaires, particularly tech mogul and billionaire investor Peter Thiel, who managed to accumulate $5 billion in a Roth Ira, particularly irked some lawmakers and the Biden administration.
That’s because under current law, Theil and his heirs will never pay another cent of tax on the Roth IRA. Many wealthy business owners and investors started off with modest contributions into traditional IRA accounts. Their explosive growth can be chalked up to the performance of the high-growth stock they contributed, Watson noted.
Thiel, who told reporters that he started his Roth IRA with a contribution of just $1,700 in 1999, used the money to purchase 1.7 million shares of PayPal when it was a startup. In subsequent years, he used his earnings inside the Roth to buy other high-flying startups like Palantir and Meta Platforms.
The IRA holders “are able to stay within contribution limits but grow high balances. For some policymakers, that’s alarming because it wasn’t an outome they considered when they created IRAs,” Watson said.
Biden is also proposing to prohibit Roth IRA “backdoor” conversions for people earning more than $400,000, or $450,000 for married couples.
Advisors and CPAs routinely recommend a backdoor conversion to taxpayers whose income level prevents them from contributing to a Roth IRA. The maneuver allows wealthy investors to convert after-tax money from IRAs and 401(k)s to a Roth and withdraw assets tax-free after five years.
Currently anyone is eligible to do a backdoor Roth IRA conversion, but Roth IRA contributions are only permitted for single taxpayers with income up to $161,000 and couples filing jointly who have income up to $240,000.
Passage of such taxes will depend on “who takes over Congress and the White House,” Watson said. “The risk is if there is a lot of control by either party."
Even with the expiring 2017 tax cuts, which Biden wants to make permanent for taxpayers earning up to $400,000, the bill cost a minimum of $2 trillion, according to a new Congressional Budget Office estimate. Former President Trump wants to extend all of the tax cuts, which would cost $9 trillion, CBO said.
“No matter what direction you go, there are no easy answers, because it’s very difficult to raise that kind of revenue,” Watson said. “One possibility is that Congress kicks the can on the extensions into 2025 so folks wouldn’t see real world impact until they do their taxes for 2026 in 2027.”
Another possibility is that Congress goes down to the wire and continues to pass temporary extenders on the expiring tax provisions, “so you get a tax code that is one big extender. I think everyone would agree that is not ideal, but with the political division in Congress it may be difficult for them to move forward any other way,” Watson said.