Build Back Better Act would curb retirement plans for the wealthy

The House of Representatives passed legislation Friday that would curb how wealthy Americans use retirement plans.

The new rules are part of a broad restructuring of the tax code tied to the $1.75 trillion Build Back Better Act, which would represent the largest expansion of the social safety net in decades and the largest effort in U.S. history to fight climate change.

House Democrats passed the bill along party lines, 220-213. It now heads to the Senate.

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Wealthy individuals with more than $10 million in retirement savings would have to draw down their accounts each year, in a new type of required minimum distribution, or RMD. Lawmakers would also close “backdoor Roth” tax loopholes, used largely by the rich, and prohibit further individual retirement account contributions once those accounts exceed $10 million.

The measures are aimed at curbing the use of 401(k) plans and IRAs as tax shelters for the wealthy.

They — along with tax provisions aimed at corporations and households making more than $400,000 a year — also raise revenue for universal pre-K, Medicare expansion, renewable energy credits, affordable housing, a year of expanded child tax credits and major Obamacare subsidies.

The retirement proposals were included in an initial House tax proposal in September. However, the White House stripped the retirement-plan rules from a legislative framework issued Oct. 28 after lengthy negotiations with holdout members of the Democratic party, who were concerned about some tax and other elements of the package.

Some of the earlier retirement proposals didn’t re-appear in the new iteration, however.

For example, the initial legislation would have disallowed IRA investments like private equity that require owners to be so-called “accredited investors,” a status tied to wealth and other factors. And some of the rules the House passed Friday would kick in years later than originally proposed.

The legislation is still subject to change in the Senate, where Democrats can’t afford to lose a single vote for the measure to succeed due to unified Republican opposition.

Currently, RMDs for account owners are tied to age instead of wealth. Roth IRA owners also aren’t subject to these distributions under current law. (One exception: inherited IRAs at death.)

The House legislation would add to those rules, asking wealthy savers of all ages to withdraw a large share of aggregate retirement balances annually. They’d potentially owe income tax on the funds.

The formula is complex, based on factors like account size and…