Interesting article on proposed IRA and Roth for high earners

[tulak]

If the bill passes I will have to change my investment plan IPS. Probably end up sending the ~$26k after-tax 401k contributions to my taxable brokerage account instead.

Same here.

The blog article I posted above is pretty good about what you should do before 2022 if this becomes law. The main takeaway I got was to make sure you don’t make any after-tax contributions in 2022, which probably means you have to stop contributions in late November since it usually takes a couple pay periods before the change goes into effect.

 

[newellcr]

Here is a clip from a Bloomberg article today, link below. I kinda feel like I'm stoking discontent, but that isn't where I'm going with this. I just find it interesting...

"More than $279 billion sits in mega-IRAs, individual retirement accounts with at least $5 million each, according to Congress’s nonpartisan Joint Committee on Taxation. Despite rules designed to limit IRA contributions by the wealthy, almost 29,000 Americans hold these giant accounts, and nearly 500 of them somehow managed to get $25 million or more into their IRAs."

https://www.bloomberg.com/news/arti...tirement-accounts-to-avoid-taxes?srnd=premium

 

[yhoomajor]

I see bit of "as long as they target people who make more than I do, is good with me" in this thread.

Sooner or later it will arrive at your door step as well. And here is one such nugget. Taxing ETFs:
https://www.cnbc.com/2021/09/16/democratic-plan-would-close-tax-break-on-exchange-traded-funds.html


Snippet from the article:
Senate Finance Committee Chairman Ron Wyden, D-Ore., has floated a new levy on exchange-traded funds to help pay for the Democrats’ $3.5 trillion budget package.

Exchange-traded funds, or ETFs, are baskets of assets — such as stocks or bonds — and can be bought or sold throughout the day like stock. While everyday investors don’t directly own the shares, a fund manager may buy or sell the underlying assets to financial institutions.
Regular investors typically avoid taxes while owning the fund because financial institutions can swap the underlying assets for others, known as an “in-kind” trade, which doesn’t trigger capital gains.

Wyden has called for ending the tax break for these in-kind transactions, according to the proposal, which may affect all investors across the $6.8 trillion U.S. exchange-traded fund industry

 

[RetireeRobert]

Considering that federal government is spending "trillions", with more multi-trillion spending bills on the way, just how much tax do they think they will collect from all the punish the rich schemes? Someone above quoted $279 "billion" sitting in "mega-IRAs. Those are not going to generate taxes more than a mere fraction of only $1 trillion. I think "punish the rich" tax schemes are counter productive when all is said and done. My opinion.

 

[PatrickA5]

I don't have a problem with any of those proposals.... the whole IRA program was intended to allow middle income taxpayers to save for retirement with an incentive of tax savings.

Given their very names, it should be obvious that the backdoors were not intended and should be closed and locked.

I also don't have any problems with restrictions on IRAs above certain limits.

Agreed.

 

[pb4uski]

Considering that federal government is spending "trillions", with more multi-trillion spending bills on the way, just how much tax do they think they will collect from all the punish the rich schemes? Someone above quoted $279 "billion" sitting in "mega-IRAs. Those are not going to generate taxes more than a mere fraction of only $1 trillion. I think "punish the rich" tax schemes are counter productive when all is said and done. My opinion.

Your "punishing the rich" is my adjust the program back to what it was intended to be to begin with. My read is that there is no punishment proposed, but that they will not allow these mega programs to get bigger.

 

[mountainsoft]

I'll never make anywhere close to $400K so it's not something that applies to me. However, the backdoor option never made sense to me. Why lock the front door but leave the back door wide open? Seems like the same rules should apply to both. You either qualify for contributions or you don't.

I've also never understood why IRA's are limited to $7000 contributions (over 50) but 401K's are allowed to contribute $19500? The same limits should apply to both. Why should I have a lower limit just because my employer doesn't offer a 401K?

Too many separate rules and loop holes.

 

[RetireeRobert]

Your "punishing the rich" is my adjust the program back to what it was intended to be to begin with. My read is that there is no punishment proposed, but that they will not allow these mega programs to get bigger.

Call them "adjusting the program back", or call them "punishing the rich", whatever one calls them, the only possible amount of tax revenue potentially generated is but a shadow fraction of the trillions in spending and spending proposals being pushed.

And I do believe these "adjustments back" will be counter productive to the country economically in the long run anyway.

 

[pb4uski]

Call them "adjusting the program back", or call them "punishing the rich", whatever one calls them, the only possible amount of tax revenue potentially generated is but a shadow fraction of the trillions in spending and spending proposals being pushed.

And I do believe these "adjustments back" will be counter productive to the country economically in the long run anyway.

Yes, but so what? What is your point? The proposals were not intended to generate trillions of dollars of revenue so you really don't have a point other than you don't like deficit spending... but that ship has sailed a long time ago.

On the last part, I think you are wrong... it won't make a rat's ass bit of difference.

 

[N02L84ER]

Now that the Secure Act was passed, when the mega Roth and IRA holders die the funds pass to the surviving spouse but after the spousal death the funds typically have to be distributed within 10 years. So, I don't see the need to limit the growth of the Roth or IRA, unless they are worried the surviving spouse will remarry someone younger, who will remarry someone younger, etc. Passed down wealth doesn't typically last more than 3 generations anyway and I certainly don't see remarriages making the funds last longer either.

 

[RetireeRobert]

The proposals were not intended to generate trillions of dollars of revenue .........

Meaning the proposals are nothing more than "punish the rich" (my original point). Otherwise, why make them? They are not to generate revenue.

 

[tulak]

Your "punishing the rich" is my adjust the program back to what it was intended to be to begin with. My read is that there is no punishment proposed, but that they will not allow these mega programs to get bigger.

I agree. This was meant as a way for normal wage earners to save money. Unfortunately it changed to something else. I’ve benefited, to a much lesser extent, and I’m ok if it’s gone. Saving in a taxable account works too.

 

[tulak]

Meaning the proposals are nothing more than "punish the rich" (my original point). Otherwise, why make them? They are not to generate revenue.

Well, do you think it’s ok for someone to have tens of millions invested and never pay any taxes?

I don’t think this is punishing anyone. This is closing a loophole that should have never existed. Punishing them would be taking back some of their gains, which isn’t part of the proposal.

Personally, I think everyone should pitch in. But people with lots of money know how to be clever to keep more of their money.

 

[pb4uski]

... I don’t think this is punishing anyone. This is closing a loophole that should have never existed. Punishing them would be taking back some of their gains, which isn’t part of the proposal. ...

Spot on.

 

[Winemaker]

Well, do you think it’s ok for someone to have tens of millions invested and never pay any taxes?

I don’t think this is punishing anyone. This is closing a loophole that should have never existed. Punishing them would be taking back some of their gains, which isn’t part of the proposal.

Personally, I think everyone should pitch in. But people with lots of money know how to be clever to keep more of their money.

Due to the SECURE Act, the gubmint will still get their money within 10 years of the owners death unless a spouse inherits. So what if it's grown to $10 million? or created by an clever omission?

There's a thread on here about "coping with change". When I started planning 40+ years ago, I used the rules "they" made. Now, because someone got their nose out of joint because of "income inequality" or "fairness", they want to change/punish those who followed the rules?

 

[DrBrisket]

I am kind of confused and not sure it matters to too many people, but. The articles talk about earnings limits for individuals, head of household, and couples. Are the rules changing for combined "Individual" accounts or combined "Individual accounts"? Meaning spouses have a $10/20M limit combined or each. It also sounds like the $10/20M limits only apply ~if you have income over the series of $400k thresholds. That would be an amazingly hard needle to thread...

How's that for an ER nerd contemplating the esoteric....

Here's a much clearer description (albeit somewhat tedious) of the proposed changes from Kitces. link

 

[pb4uski]

Due to the SECURE Act, the gubmint will still get their money within 10 years of the owners death unless a spouse inherits. So what if it's grown to $10 million? or created by an clever omission?

There's a thread on here about "coping with change". When I started planning 40+ years ago, I used the rules "they" made. Now, because someone got their nose out of joint because of "income inequality" or "fairness", they want to change/punish those who followed the rules?

The rules will be changed to align them with the original intent of the program and address unintended consequences of some people using the rules for a benefit that wasn't intended. There is no punishment... just no continued benefit once the account balance eclipses a certain amount... though I can see that some who might be impacted might view the curtailment of a benefit as punishment... but suck it up buttercup.

Stop whining and start "wine"ing.

 

[CRLLS]

IMO, which doesn't amount to a hill of beans, is that the real "loophole" that exists is not the backdoor conversions, but is twofold. 1) the difference in allowed contributions between 401Ks and IRAs; and 2) the that Roth 401Ks have RMDs and Roth IRAs don't. Possibly a third loophole is that the 401K and IRAs are protected from creditors differently.

IMO both were "intended" to be personal retirement accounts that supplement other savings and pensions. and should be treated equally. The only difference is that companies can contribute additional monies into the 401k, a totally voluntary contribution from the company's perspective. More and more are opting to not contribute matching dollars.

I would attack the root problem, not the consequences of different rules for the different retirement account programs.

 

[cathy63]

I am wondering about the ban on conversion of after-tax money from tIRAs to Roth IRAs starting in 2022. I have an IRA that has about 8% after-tax money and I've been slowly converting it since I retired 5 years ago. (This is an old account that had both after-tax and pre-tax money in it way before Roth IRAs and conversions were invented.) The current rules are that the funds have to be convered pro-rata, so 8% of every conversion is tax-free.

I am curious about whether I would be prohibited from converting any of these funds in the future, or if the pro-rata rule just goes away and all conversions come from the pre-tax money. I haven't gone to find the actual text of the bill, and the summaries I've read don't cover this case, so if anyone has seen something that's more detailed than "no more back-door Roth conversions", I would appreciate a link to the info.

 

[ncbill]

Shouldn't the government be encouraging the wealthy to convert?

Presumably they'd be doing so in some of the highest personal tax brackets.

As opposed to cheapskates like myself who won't be exceeding the 12% bracket by gradually converting traditional IRA accounts to Roth.

 

[RetireeRobert]

Shouldn't the government be encouraging the wealthy to convert?

Presumably they'd be doing so in some of the highest personal tax brackets.

As opposed to cheapskates like myself who won't be exceeding the 12% bracket by gradually converting traditional IRA accounts to Roth.

Yes, good thinking. The government tax policy should "encourage", and not "punish".

 

[pb4uski]

Tax-free growth for life would seem to be encouraging enough, especially if you or your heirs would pay higher tax rates on that money if it is withdrawn later.

 

[SoClose]

Here is a clip from a Bloomberg article today, link below. I kinda feel like I'm stoking discontent, but that isn't where I'm going with this. I just find it interesting...

"More than $279 billion sits in mega-IRAs, individual retirement accounts with at least $5 million each, according to Congress’s nonpartisan Joint Committee on Taxation. Despite rules designed to limit IRA contributions by the wealthy, almost 29,000 Americans hold these giant accounts, and nearly 500 of them somehow managed to get $25 million or more into their IRAs."

https://www.bloomberg.com/news/arti...tirement-accounts-to-avoid-taxes?srnd=premium

There are others ways beside personal contributions to obtain high IRA balances.

When leaving an Employee Owned company (ESOP) you can convert your balance to IRA. The annual corporate ESOP contributions can amount of 25% of payroll.

 

[newellcr]

Here's a much clearer description (albeit somewhat tedious) of the proposed changes from Kitces. link

DrBrisket,

Thanks for the link. It was very helpful and very nicely laid out. Interestingly, for the RMD for $10M section, none of the examples use married people. The text does repeatedly says 'individual' so I, for now (so I can sleep ), will interpret that each spouse has $10M of headspace...

Kind Regards,

 

[newellcr]

Yes, it looks like with income under $400k conversions will still be permitted to 2031. The big change is the elimination of all after-tax contributions to qualified plans like the 401k from 2022. Luckily this year I have already maxed out my after-tax 401k contributions and Mega backdoor it to my ROTH IRA.

If the bill passes I will have to change my investment plan IPS. Probably end up sending the ~$26k after-tax 401k contributions to my taxable brokerage account instead.

ExPatKiwi,

Take a look at the link DrBrisket posted. I am pretty sure it says disregard the $400k limits thru 2031 on pre-tax money. You can convert after tax money thru the end of this year. Take a look at the 'future prohibitions on conversions' section and the 'Nerd Note'. Do those pre-tax Roth conversions at will thru 2031...

Kind Regards,