The elimination of so-called “Mega” Roth IRAs has once again been added in as a provision to President Joe Biden’s “Build Back Better” package inching toward a vote in the House of Representatives, as a way to generate revenue to help pay for the roughly $1.85 trillion social and climate spending bill.
But one major change to the Mega Roth provision in an updated draft of the House bill released Wednesday that is curiously flying under the radar is a significant shift in effective dates, from a period of tax years beginning after Dec. 31, 2021, to after Dec. 31, 2028, as first reported by the National Association of Plan Advisors.
That’s an extra seven years of life for the controversial individual retirement accounts used by some ultra-wealthy Americans as powerful tax-avoidance vehicles.
The added-back provisions would prevent contributions to IRA or Roth accounts once they reach $10 million, applying to individuals who make over $400,000 and married joint filers with more than $450,000 in income, and would also require mandatory distributions for accounts that exceed that amount. Another provision would also require accounts with at least $2.5 million to report their balances annually to the IRS.
The Mega Roth IRA provision is an issue House Ways and Means Committee Chair Richie Neal (D-MA) and his Senate counterpart, Finance Committee Chair Ron Wyden (D-OR), had both championed.
Ever since ProPublica reported in June that PayPal co-founder Peter Thiel owns a Roth IRA that had grown from less than $2,000 in 1999 to a staggering $5 billion in 2019, lawmakers have placed increased scrutiny on how some ultra-wealthy individuals have amassed huge fortunes in the tax-sheltered individual retirement accounts intended to provide retirement security to middle-class families.
Neal originally proposed putting those changes in place next year, but the latest version wouldn’t implement them until 2029. The same delayed timeline would apply to requirements that people with aggregate IRA balances over $10 million take minimum distributions from the accounts, triggering taxes on the withdrawals.
According to a Nov. 4 article on Roll Call citing “a source familiar with the discussions,” the House’s Mega Roth provision in its current form “has enough backing to pass the Senate.”
Congress’ nonpartisan Joint Committee on Taxation says more than $279 billion sits in Mega-IRAs, classified as IRAs of at least $5 million.
Most 401k plans don’t allow mega-backdoor Roth conversions, but a growing number (especially technology companies with high-earning employees) have added the feature in recent years to help them compete for elite talent.
A Sept. 24 WSJ article cites Alight Solutions research showing that about 30% of plan sponsors allow the mega-backdoor strategy in their 401ks, and nearly 20% of the 23,500 401k plans administered by Fidelity Investments allow it.
The resurrection of the IRA provisions raised the ire of the Taxpayers Protection Alliance (TPA), a nonprofit dedicated to educating the public on government policy effects on the economy.
“After weeks of infighting between moderate and progressive Democrats—and in the aftermath of Democrats’ stunning defeat in Virginia—it appears that President Joe Biden and House Speaker Nancy Pelosi (D-CA) are doubling down in their promise to raid Americans’ IRAs to fund their multi-trillion-dollar dumpster-fire of a social spending bill,” said a statement from the organization, titled “Don’t Touch My IRA.”
TPA also noted that Rep. Tom Reed (R-NY) submitted an amendment to the Rules Committee that would strip the entire section of the bill that imposes new taxes and audits on IRAs.
If the IRA provisions survive the House, they may still face a challenge in the Senate, where Sen. Kyrsten Sinema (D-AZ) has signaled she opposes IRA changes.
Backdoor Roth closing
As NAPA reports, the updated draft of the bill also seeks to eliminate the backdoor Roth IRA strategy by “prohibiting all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth—regardless of income level, effective for distributions, transfers and contributions made after Dec. 31, 2021.”
So the ban on backdoor Roths would hit next year, unlike the elimination of the Mega Roth strategy.
The bill in its current form also eliminates 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). But another major caveat—it wouldn’t happen for a decade: NAPA reports this provision would only apply to distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.
What’s next
The legislation, which could get a vote in the House on Friday, is not yet final and is expected to undergo more revisions as it moves through Congress.
Top House Democrats are confident they can pass their massive spending bill via reconciliation Friday after making progress in their negotiations late Thursday, but a few moderate holdouts with procedural demands remain. Among those demands are time to review the final text of the bill, a CBO score for it, and pre-conferencing assurances the Senate will not make substantial changes to the bill once the House passes it.
As no Republicans are expected to vote for the bill, House Democrats can afford to lose only three votes in the narrowly divided house to pass the legislation. House Speaker Nancy Pelosi is known for not bringing votes to the House floor unless she knows they will pass.
If the retirement provisions get bumped again before making it to President Biden’s desk, there’s a decent chance they could end up in the bipartisan SECURE Act 2.0 package widely expected to be considered on Capitol Hill in 2022.
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