The House Ways and Means Committee plans to vote on legislation Tuesday and Wednesday to usher in several changes to individual retirement accounts as well as increase the corporate tax rate and raise taxes on high earners.
Committee Chairman Richard Neal’s plan, released Monday, prohibits taxpayers from contributing to their IRAs once their account balance exceeds $10 million, increases the required minimum distributions for high-income taxpayers with large balances and eliminates so-called “backdoor” Roth IRA strategies for certain taxpayers.
“It’s off the charts stuff. Making all these laws for three or four people is insane,” Ed Slott of Ed Slott & Co. told ThinkAdvisor Monday. “To try and limit the amount people have in an IRA is almost un-American.”
The Massachusetts Democrat announced that his committee will continue to consider measures on Tuesday and Wednesday under the budget reconciliation instructions.
Ways and Means also will vote on measures to increase the capital gains tax rate for high-income individuals to 25% and increase the top marginal individual income tax rate to 39.6%.
This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500, according to Neal’s plan.
As for changes to IRAs, Neal’s plan would:
1. Prohibit further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation).
2. Increase minimum required distributions for high-income taxpayers with large retirement account balances. If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50% of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.
3. Close so-called “backdoor” Roth IRA strategies by eliminating Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031. The bill also prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after Dec. 31, 2021.
Neal’s plan would also replace the flat corporate income tax with a graduated rate structure. The rate structure provides for a rate of 18% on the first $400,000 of income; 21% on income up to $5 million, and a rate of 26.5% on income thereafter, the plan explains.
Pictured: Rep. Richard Neal (Photo: Stefani Reynolds/Bloomberg)