House Democrats propose new retirement plan rules for the wealthy
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House Democrats proposed a slew of changes to retirement accounts for the rich on Monday, part of a restructuring of the tax code tied to a $3.5 trillion budget plan.
Taken together, Democrats’ reforms aim to erode the use of retirement accounts as a perceived tax shelter for the wealthy and instead promote them as a way for low- and middle-income Americans to build a nest egg.
Most of the changes would start in 2022.
Wealthy individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled Monday by the House Ways and Means Committee.
The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year. It would also prevent savers from using the “mega-backdoor Roth” strategy, regardless of income level.
Further, the legislation would prohibit individual retirement accounts from holding investments that require buyers to be accredited investors, a status generally reserved for wealthy investors.
The proposals are part of a broader theme of raising taxes on those who earn more than $400,000 a year to help pay for education, climate, paid-leave, child-care and other measures while also making the tax code more equitable.
They also follow Democrats’ outcry following a recent ProPublica report that Peter Thiel, a PayPal co-founder, owns a Roth IRA that had grown to $5 billion in 2019, up from less than $2,000 in 1999.
“IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,” Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, said in July after a data release showing growth of “mega” IRAs.
Democrats have narrow margins within which to pass a bill, which they aim to do with a simple majority via a budget reconciliation maneuver.
Republicans remain staunchly opposed. Rep. Kevin Brady, R-Texas, ranking member of the Ways and Means Committee, framed the spending as the “greatest expansion of the welfare state in our lifetimes” during a Thursday hearing, saying that it “wastes hard-earned tax dollars.”
Contribution limits
Current law lets taxpayers make IRA contributions regardless of account size.
However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined IRA and defined-contribution plan exceeds $10 million. A defined-contribution plan is a 401(k) plan or other similar workplace savings plan.
The policy’s purpose would be “to avoid subsidizing retirement savings once account balances reach very high levels,” according to a proposal outline.
That limit would apply to single taxpayers with more than $400,000 of taxable income. The threshold would be…
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