Forthcoming 401K and Roth conversion changes

[Barbreek]

As a late started but high earning family, these proposed changes to outlaw Roth conversions including backdoor Roth, and capping IRA accounts, do not look good. How will the saving climate change for high earners with these changes?

https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html

[Random1]

Apparently when when you burn through greenbacks when you are retired it somehow converts to CO2 affecting global warming.

My take is that it is easy to pick apples from an apple tree that has a lot of apples., than an apple tree that has no apples on it.

[wa2106]

Only proposes to limit Roth conversions for those making more than $400,000/yr. Who would be converting at highest bracket anyway. Goal of conversions is to do it in low-income year which this would not affect.

Now whether it's inflation adjusted is a different matter.

[JBME]

icky. really icky. perhaps worse than SECURE. However, keep two things in mind:

1) this is a proposal. far from actual law
2) it's easy to forget that it is congress/laws that gave you the backdoor and mega backdoor and roth conversions in the first place. If you didn't take advantage, that's on you. They giveth, and thus they can taketh away

BTW, there's this: "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." Gee, I wonder how they got this idea. When the story about Peter Theil's Roth IRA came out several months ago I was pissed b/c I knew this guy who took advantage of a situation that the law clearly did not intend (but was legal) would give people a reason to limit Roth IRAs in some way. I have no doubt that the quote from the article wouldn't exist if Peter Theil hadn't done what he did (or any other super rich dude for that matter)

[MP]

What is the chance of this going through? many WCI hacks may be going down the toilet:
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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 $450,000 for married taxpayers filing jointly and $425,000 for heads of household.
RMDs for ‘mega’ IRAs


Individuals whose combined traditional IRA, Roth IRA and defined-contribution retirement accounts exceed $10 million at year’s end would have to withdraw at least 50% of the excess the following year.

Those with account totals exceeding $20 million must pull from Roth IRAs and 401(k) plans first.

These new required minimum distributions for mega IRAs would only be required for savers whose taxable income exceeds the same thresholds identified above for the contribution limits.
Backdoor Roth


There are income limits to contribute to Roth IRAs. In 2021, single taxpayers can’t add money to such accounts if their income exceeds $140,000.

But current law allows for “backdoor” contributions to Roth IRAs. That can be achieved by converting a traditional IRA or Roth 401(k) account, which don’t carry income limits. There are income limits that determine whether contributions to traditional IRAs are tax-deductible or not.

Savers pay tax on the conversions, but their future investment growth and retirement distributions are tax-free.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans such as 401(k) plans.

The policy would apply at the same income thresholds listed above. It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.
Mega backdoor Roth


The so-called “mega-backdoor Roth” strategy uses a principle similar to that of the backdoor Roth.

The strategy lets high earners save up to $58,000 in a 401(k) plan — more than the traditional $19,500 contribution limit — using a type of after-tax 401(k) bucket. Savers then convert that savings to a Roth account, once again yielding the benefit of tax-free investment growth.

Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account.

This policy would apply for everyone, regardless of income level.
Accredited investors


Democrats’ legislation would disallow IRA investments that require the owner to have a minimum level of assets or income, or to have completed a minimum level of education or obtained a specific license or credential.

This would apply, for example, to accredited investors seeking to buy a private investment.

IRAs with these investments would lose their IRA status — meaning they’d lose their tax benefits.

These rules would apply starting in 2022, but there’d be a two-year transition period for IRAs already holding these investments.

[CordMcNally]

"PROPOSED". We could spend all the time in the world talking about proposed legislation. Things get proposed every year and sometimes the same thing gets proposed year after year after year. Wake me up when something passes.

[G]

"PROPOSED". We could spend all the time in the world talking about proposed legislation. Things get proposed every year and sometimes the same thing gets proposed year after year after year. Wake me up when something passes.

Agree completely. We are several steps away from even needing to look to see if it is worth a look.

[Hoopoe]

Looks like the house just proposed some changes to retirement accounts to help pay for the new infrastructure bill being proposed.

A few key takeaways should it pass as written (not at all a guarantee).

- eliminate back door Roth IRA, and mega back door Roth
- mandatory distributions on retirement accounts above 10 million making it harder to get much more in there
- can’t hold accredited investor assets in self directed 401k

https://www.google.com/amp/s/www.cnbc.com/amp/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html

[abds]

Only proposes to limit Roth conversions for those making more than $400,000/yr. Who would be converting at highest bracket anyway. Goal of conversions is to do it in low-income year which this would not affect.

Now whether it's inflation adjusted is a different matter.

All of our standard annual backdoor Roths are “Roth conversions.” As are the less common mega backdoor Roths. So it would affect everyone here.

[VentAlarm]

I’ve heard Jim say: if you can’t live on 200k, you have a spending problem.

A corollary: if guy can’t govern on 3.4T, you have a spending problem.

[wa2106]

All of our standard annual backdoor Roths are “Roth conversions.” As are the less common mega backdoor Roths. So it would affect everyone here.

That's a good point but the majority of physicians still make less than $400,000/yr and would still be allowed. I'm not sure backdoor Roth is really making that big of an impact in most high earners retirement plans. It's true Roth conversions that are far more valuable in low (i.e. <400,000/yr) income years

[GasFIRE]

I'm not sure backdoor Roth is really making that big of an impact in most high earners retirement plans.

While the yearly amount allowed in a 401k/403b is significantly higher than an IRA, it can still make quite an impact. I've been contributing to a BD Roth for both me and my wife every year since 2010 when it was first allowed for high income earners. Together we now have close to $1M from the BD Roth. With ~$150K in contribution basis, that's quite a bit of $$ shielded from cg taxation.

That said, I'm not worried...yet. This still has to go through the legislative sausage grinder before we know the end result. While some tax-advantaged opportunities may be limited, there should still be some tax-saving avenues available, even for high income earners. It will just become more important to maximize whatever tax-advantaged opportunities you do have.

[abds]

That's a good point but the majority of physicians still make less than $400,000/yr and would still be allowed. I'm not sure backdoor Roth is really making that big of an impact in most high earners retirement plans. It's true Roth conversions that are far more valuable in low (i.e. <400,000/yr) income years

I’m not losing sleep over proposed changes, but I still hope they don’t happen. I make more than 400k, as does every physician in my group. People being dismissive of changes like this because they only affect others making more than them is the crux of the “paying their fair share” movement, which I fear will ultimately trickle down to acceptance of higher taxation on everyone, instead of addressing spending problems.

$12,000 of BDR space on a $400,000 income is a 3% savings rate. 3% could be 15% of someone’s savings (assuming total savings rate of 20%). That’s a big deal in future taxes.

[bean1970]

Also in this legislation is proposed "monitoring" of balances is also a slippery slope. Just spying to me to figure out where to tap into next.

i realize this is all proposed, but at some level these are good things to think about how your retirement plans and how you save could get dismantled over the next several decades as various savings vehicles get targeted.

[zlandar]

The people championing a $3.5 trillion boondoogle can't comprehend the difference between a high income and high net worth.

Physicians with a six-figure debt load and no meaningful income until their early 30's get it.