Congressional Democrats want to slam a fiscal loophole known as the Roth IRA “back door”. In one of several proposed changes targeting wealthy Americans’ retirement accounts, Democrats on the Ways and Means Committee of the House of Representatives want to ban people who earn more than $ 400,000 per year from converting savings accounts for the pre-tax retirement in a Roth IRA. The proposed reforms are part of the Democratic push to raise taxes on the wealthiest to fund a $ 3.5 trillion spending plan.
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Roth IRA Backdoor Conversions: Definition and Elimination Proposals
Under current tax law, people who earn more than $ 140,000 per year cannot contribute to a Roth IRA, where retirement savings grow tax-free. However, since 2010, workers who exceed this income threshold have been allowed to convert their pre-tax contributions to a Roth IRA. After income taxes on initial contributions and payment of earnings, your retirement savings grow tax-free and will no longer be subject to tax. minimum required distributions (RMD).
These backdoor Roth conversions, which have gained popularity, allow high-income individuals to bypass the income requirements in Roth IRAs and capitalize on the tax-free growth that these types of accounts offer.
But the use of this strategy could be coming to an end. Democrats in the House Ways and Means Proposal, you want to ban Roth conversions for people who make more than $ 400,000 per year. If approved, the rule change would apply to distributions, transfers and contributions made in taxable years beginning after Dec. December 31, 2031.
The proposed legislation also seeks to eliminate Roths from “mega backdoor”, a sophisticated strategy that allows people enrolled in certain retirement plans to save up to $ 38,500 in additional after-tax retirement contributions. If approved, the provision targeting Roth mega backdoor conversions would take effect after December. December 31, 2021.
New limitations on IRA contributions
Democrats also want to ban high-income taxpayers from accumulating tax-deferred fortunes within retirement accounts. To do so, they plan to restrict people above certain income thresholds from continuing to contribute to Roth and Traditional IRAs if they already have $ 10 million saved in IRAs or other defined contribution retirement accounts. Under current law, taxpayers can contribute to IRAs regardless of how much they have saved.
The proposed limit for contributions would apply to single or married taxpayers filing separately and earning more than $ 400,000, married taxpayers filing jointly with taxable income greater than $ 450,000, and heads of household who earn more than $ 425,000.
The proposed crackdown comes as the retirement accounts of the wealthiest Americans continue to rise. According to the Government Accountability Office, 9,000 taxpayers had at least $ 5 million saved in IRA accounts in 2011. Eight years later, that number had more than tripled to more than 28,000, data from the Joint Tax Committee shows.
Under this part of the Democratic proposal, employer-sponsored defined contribution plans should also report balances over $ 2.5 million to both the Internal Revenue Service and the plan participant whose balance exceeds $ 2.5 million.
Minimum distribution required for accounts exceeding $ 10 million
Democrats also propose that high-income people with more than $ 10 million saved in retirement accounts should take minimum distributions from those accounts.
“If an individual’s combined defined contribution, traditional IRA, and Roth IRA retirement account balances generally exceed $ 10 million at the end of a taxable year, a minimum distribution would be required for the following year,” the proposal says.
Under the legislation, the Internal Revenue Service (IRS) would require high-income individuals with more than $ 10 million saved in retirement accounts to receive a distribution equal to 50% of their savings that exceed the threshold of $ 10 million. For example, if Joan has $ 12 million in her 401 (k) and multiple IRAs, she will be required to accept a distribution of $ 1 million the following year.
The income thresholds would be identical to those in the proposal that aims to curb IRA contributions for the wealthy. If approved, both provisions would take effect after Dec. December 31, 2021.
Big changes are likely to come to the retirement accounts of wealthy Americans. House Ways and Means Committee Democrats want to eliminate clandestine Roth IRA conversions, ban high-income individuals with more than $ 10 million in retirement accounts from contributing to their IRAs, and require certain individuals from high income with huge retirement savings make annual distributions.
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