Massive Changes May Be Coming to Your Retirement Accounts

October 20, 2021

My deep-rooted passion for helping people achieve financial success within their retirement and beyond is the sole reason as to why I do what I do. I have long spoken about the impact of taxation on retirement accounts, and congress is currently working on making sweeping changes to your retirement savings. Congress is trying to tamper with the nest egg you’ve spent your lives tending to and protecting.

On September 13, 2021 the House Ways and Means Committee released a draft legislation of proposed changes to retirement accounts entitled “The Ways and Means Tax Proposals”. These proposals include adding income limits for conversions and total elimination of the back-door Roth conversation strategy. Targeting large IRAs and high-income retirement savers, these proposals are specifically designed to raise revenue by imposing new asset limitations and prohibitions. If these proposals go according to plan, this bill is set to become effective for 2022.

These significant changes are targeting higher net worth individuals by taking away key tools used to create the retirement our clients deserve. If you don’t find yourself within this financial bracket, don’t let that hinder your interest in educating yourself on this proposal. Even though these changes appear to only affect higher net worth individuals, these proposals will only begin to open doors for congress to extend these changes to the middle class. Congress is coming after your biggest assets when it comes to your retirement savings, and it’s crucial to understand exactly what has been laid out within this draft legislation.

Contribution Limits for IRAs of High-Income Taxpayers. This legislation would prohibit further contributions to a Roth or traditional IRA for an entire tax year if the total value of an individual’s IRA and defined contribution accounts exceed $10 million as of the end of the prior tax year. These limits of contributions would apply only to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, and married taxpayers filing jointly with taxable income over $450,000.

Mandatory RMDs for High-Income Taxpayers. 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.

Income Limits on Roth Conversions. Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, and married taxpayers filing jointly with taxable income over $450,000, would be eliminated. However, this proposal would not be effective until 2032.

No Conversions of After-Tax Dollars. Regardless of income level, this proposal would forbid after-tax IRA and plan contributions from being converted to Roth. This would eliminate the back-door Roth IRA conversion and Mega backdoor Roth IRA conversion strategies.

IRA Investments Limited.  This bill would prohibit an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income. This would also require individuals to have completed a minimum level of education or obtained a specific license or credential. This rule would include a 2-year transition period for IRAs already holding these investments.

Expand the Statute of Limitations for IRA Noncompliance. The bill proposal would extend the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years. This would help the IRS pursue these violations that may have originated outside the current statute’s 3-year window.

Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest. The bill makes the current prohibited transaction rules that apply when the IRA owner has an interest in a particular investment much stricter. There is a 2-year transition period for IRAs already holding affected investments.

IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules. The bill clarifies that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner or IRA beneficiary is always a disqualified person.

Our team takes on unique strategies within our individualistic approach to retirement in order to help mitigate taxation on your retirement savings. We take pride in our ability to tend to your specific financial needs to ensure that you live out a full and comfortable retirement. If these changes happen to come into effect this following year, we will promptly and effectively adapt. This issue is extremely time sensitive and it’s important to note that we all must act soon if these proposals become law.

At Bridgelight Financial Advisors we make it one of our top priorities to ensure our clients are prepared in every way for retirement no matter what congress throws our way. If you are in need of a financial advisor that specializes in helping you make your retirement a successful one, our team at Bridgelight Financial Advisors would love to help you experience confidence in every aspect of your financial plan. Call (203) 795-7080, email, or schedule an appointment online to meet and get started.

About Bill

Bill Leavitt is the president of Bridgelight Financial Advisors, an independent, privately owned fiduciary financial advisory and financial planning firm. He specializes in working with pre-retirees, retirees, professionals, and women investors, helping them navigate a complicated and ever-changing investment landscape. With over 25 years of experience, Bill serves his clients using his own unique financial planning model, The Wealth Focus™ Process, where he helps clients develop their customized long-term wealth strategy in four comprehensive steps. A Connecticut native, Bill resides in southern Connecticut with his wife, Laura, and their three daughters. To learn more about Bill, connect with him on LinkedIn.

Congress Looks to Eliminate Back-Door Roth Strategies

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