That’s because Congress’s proposals are taking aim at Americans with high IRA balances and techniques for higher-income Americans to contribute assets to a Roth account.
“There were some really unbelievable retirement proposals to limit IRA contributions,” said Slott. “They have this thing where they are worried about mega-IRA balances. They’re over-worried in my opinion because it’s a small number of people with big IRAs.”
One proposal would prevent individuals with retirement account balances over $10 million in aggregate from contributing to an IRA if their adjusted gross income exceeds $400,000 for single filers or $450,000 for married filing jointly. Slott pointed out that the proposal imposes a “huge marriage penalty” as two single filers could have $800,000 of income between them and still contribute to an IRA, but a married couple would be limited to $450,000.
Slott also doubted the efficacy of the proposal.
“What are we talking about here, future contributions? Those are limited to $6,000, or $7,000 if they are 50 or over,” said Slott. “Is this really necessary, to tell someone with over $10 million in an IRA, ‘sorry, we’re really going to let you have it by saying you can’t put another $6,000 in?’ That’s not even one-tenth of 1% of their balance, not even a grain of sand on the beach. I don’t understand that, but it’s a proposal they put out there that probably wasn’t even worth their time—but that gives you an idea of where Congress is going with this.”
Hand in hand with that proposal is another that would raise required minimum distribution amounts for high-balance IRAs for amounts deemed excessive—over $10 million or $20 million.
“Start looking at some clients with large IRAs and think about some ways to cut them down, maybe with Roth IRA conversions which are always good to plan near year's end,” said Slott. “We know the tax rates for today, 2021, but we don’t know what they might be for next year. It might be time to start taking down these IRA balances.”
Another area Congress is taking aim is at “backdoor” Roth IRA contributions, which allow higher-income Americans to move assets into a Roth IRA when they are unable to contribute to them directly.
Backdoor Roth IRA contributions are made via non-deductible contributions to traditional IRAs or workplace retirement plans, which are then moved into the Roth account. One proposal would ban Roth IRA conversions for those with more than $400,000 in annual income as individuals or for married couples filing jointly who have more than $450,000—another imposition of a marriage penalty.
“Here’s the great thing about this—Congress still wants that money from the higher earners. They’re using it to fund this whole package and Congress loves Roth IRAs and Roth conversions,” said Slott. “They only say they don’t like them because it sounds good, but they love the income that comes from them. They’re addicted to the Roth IRA and just can’t quit them because the tax revenue is too good to be true. So the provision to eliminate Roth conversions for anyone above the $400,000/$450,000 mark is not going to go into effect for a decade. The effective date is 10 years from now, after 2031. Why did they even bother?”