Interesting article on proposed IRA and Roth for high earners

[Winemaker]

The new proposal may actually make large Roth conversions impossible, as the conversion amount is not backed out of the Adjusted Taxable Income Amount, and would push you over the income limit amount.

 

[Winemaker]

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.

So it took 40 years to to correct an unintended benefit? I don't think so.

Just a lot of jealousy out there. But you are missing my point. The new proposal stops conversions if your income for married folks is $450,000 in 10 years, 2032. So they will still have the conversion tax money for the next 10 years. What would inflation do to a the 2021 $200,000 income of a married couple in that period? It doesn't affect me as I have no earned income, so nothing for me to "suck up".

Secondly, the gubmint changed the rules with the SECURE act, so they're getting the money anyway whether your retirement account is $400,000 or $400,000,000. So why put limits on the accounts?

 

[pb4uski]

So it took 40 years to to correct an unintended benefit? I don't think so.

Just a lot of jealousy out there. ...

Yes, it took 40 years to correct an unintended benefit. Actually, the unintended benefit has been apparent for some time but the political gears of government often turn slowly.

IMO, if one thinks it is jealously then they are a little too full of themselves.

 

[Winemaker]

Yes, it took 40 years to correct an unintended benefit. Actually, the unintended benefit has been apparent for some time but the political gears of government often turn slowly.

IMO, if one thinks it is jealously then they are a little too full of themselves.

I'll give you the fact that it was an unintended benefit, and the Secure Act fixed that.

But this new proposal, is coming 2 years after SECURE'S passage. I realize it is not law just yet, but it will be punishing to a couple in 10 years that are making $200,000 now. Their salaries will be much higher, hopefully, their returns will stay historical, but will not be able to convert anything if they have a $450,000 adjusted taxable income.

And why put an upper limit on the size of thes accounts? They have to be spent in 10 years anyway.

 

[Sunset]

...

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?

.....

+1
That seems so unfair and simple to fix.

I was caught by that, due to employer not having a 401K. Also caught by when the employer had a 401K, but it was no matching, and not really good choices. Still contributed as could put in much more than in an IRA.

It affects workers whose employer doesn't have a 401K or has a lousy (expensive) 401K.

 

[RetireeRobert]

+1
That seems so unfair and simple to fix.

I was caught by that, due to employer not having a 401K. Also caught by when the employer had a 401K, but it was no matching, and not really good choices. Still contributed as could put in much more than in an IRA.

It affects workers whose employer doesn't have a 401K or has a lousy (expensive) 401K.

+2 Very unfair dissimilar treatment of contribution limits.

 

[Retire2023]

Am I correct in my interpretation that there is no impact on ROTH conversions from pre-tax accounts? They just proposing restricting conversions of after tax amounts(in addition to the other items)?

 

[Trailwalker]

I'll be very surprised if this bill becomes law. I'm okay with it if it does, but I just don't see enough solidarity among Democrats to make it past the finish line.

 

[pb4uski]

....And why put an upper limit on the size of thes accounts? ...

Because it was never intended to allow people to defer income taxes on tens of millions. I'm guessing that at the time it was passed if someone contributed the max for a 35 year career and it grew at 7 or 8% that it would only have been a million or so.

The later came 401ks and higher annual contribution and then people got he bright idea to put start-up stock in it and ended up with many millions in IRAs.

I'll concede that perhaps they didn't give adequate consideration to how big these IRAs would become.

 

[Winemaker]

^^^ But it still will be taxed within 10 years of the death of the owner and/or spouse. Uncle Sam still gets his money.

 

[Exchme]

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.

The Kitces article linked above covers this as well as any and says you won't be able to convert. There's no text in the bill getting rid of the pro-rata rule, so you must convert your after-tax money pro-rata as you make conversions, but the new rule would be you can't convert your after-tax money. So no conversions would be possible for you! I'm in the same boat, years ago when savings were hard to come by in our household, I scrimped and diligently saved and put a little after-tax money in my IRA. This would make that move disastrous.

Perhaps you could still do conversions if you abandoned all claim to any of the money being after tax, but then you are simply letting them tax you twice on the same money. Talk about unfair!

 

[pb4uski]

^^^ But it still will be taxed within 10 years of the death of the owner and/or spouse. Uncle Sam still gets his money.

Unfortunately, that's not the point.... under your thinking there shouldn't be RMDs at all because that IRA money would still be taxed within 10 years if the owner or spouse dying.

 

[cathy63]

The Kitces article linked above covers this as well as any and says you won't be able to convert. There's no text in the bill getting rid of the pro-rata rule, so you must convert your after-tax money pro-rata as you make conversions, but the new rule would be you can't convert your after-tax money. So no conversions would be possible for you! I'm in the same boat, years ago when savings were hard to come by in our household, I scrimped and diligently saved and put a little after-tax money in my IRA. This would make that move disastrous.

Perhaps you could still do conversions if you abandoned all claim to any of the money being after tax, but then you are simply letting them tax you twice on the same money. Talk about unfair!

Ugh! Thanks for the info. Sorry you're caught in it as well. It's not too horrible for us because DH's IRA is fully pre-tax so if this bill passes we can just convert his instead. We were never going to convert all our tIRA funds before RMDs hit anyway, so the effect for us would be to reduce the total amount we convert by ~8%.

 

[RetiredHappy]

We did not do any IRA conversion because the (financial) stars didn't line up. We are ok with that. Taxes got to be paid one way or the other, sometimes more and other times less.

 

[all4j]

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.

Isn't it sorta like the reason bank robbers rob banks? I've not considered it a financial tool to pay for spending, but a political tool. I haven't seen the age distribution of the owners of this $279B, or even how many there are. Presumably many would be inherited in upcoming years anyway. So, if not wanting to be punitive, nature could have taken its course. A phased in cap could have softened the blow.

For some reason I'm reminded of the history of the alternative minimum tax. Stated with something like 25-150 instances of rich people government was going after in late 1960s. A few years ago before some changes made, it was up to several million...but no one had to vote to get those extra taxpayers caught in the net

 

[DawgMan]

Skimmed quickly through most of the comments and need to read the Kites article. Observation... it feels like there is a little political jarring going on here. Which ever side of the fence you are on, I think we all have been around long enough to understand the tax code pendulum swings back and forth, depending on who is running the show. No surprise here that higher incomes, higher account balances, and NW/estate values are being targeted whether it is Roth conversions, ETF taxes, etc. What I always find interesting is people using the terms "fair" (their definition) and "loophole" (dirty rich cheating SOB!) in these sometimes emotionally charged discussions. Oh, and I would suggest "intention" is not always as easily defined and often comes with warm fuzzy feel good words. Further, I would suggest to you most of us, as financially savvy folks, regardless of our level of income or wealth, will look at the current tax code and make decisions/employ strategies that are legal and best suit us personally, no? Does the the guy making $20K/yr think the guy making $100K/yr is taking advantage of loopholes? Not paying his "fair" share? I don't know, where I come from I celebrate capitalism, the opportunity to grow one's wealth. Do I like/agree with every tax policy? Absolutely not, but I do generally understand the who/why/where it's coming from. I subscribe to the philosophy, "Tell me the rules and I will play the game". Is that fair? Am I taking advantage of loopholes? I suppose that is for you to decide.

Ok, just my opinion...

 

[street]

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.

I see it that way also. Some of the avenues need to be addresses for many reasons.

 

[target2019]

DawgMan, I don't feel you are taking advantage of loopholes. You are taking advantage of a "backdoor" method which is permitted under the existing law. Once I saw the trigger word "loophole" introduced near the beginning of this thread, the discussion turned away from the substance of the article, I believe. This happens in most discussions. But then things get back on point.

I have no problem with tax law evolving, either.

 

[DawgMan]

DawgMan, I don't feel you are taking advantage of loopholes. You are taking advantage of a "backdoor" method which is permitted under the existing law. Once I saw the trigger word "loophole" introduced near the beginning of this thread, the discussion turned away from the substance of the article, I believe. This happens in most discussions. But then things get back on point.

I have no problem with tax law evolving, either.

Sort of my point... regardless of what we all want to try and infer are the laws intentions and what is fair, I fault no one for legally taking advantage of the current tax code. As it changes, we adjust. Backdoor conversions have never been an option for me, but I plan on doing strategic Roth conversions at the optimal level until 70, but if the code changes, I will just adjust and play by the new rules.

 

[Montecfo]

I appreciate all the details and links that have been posted in this thread. It has been helpful to me in understanding the proposed tax provisions under consideration. The folks who have begun studying these provisions have made many helpful contributions.

On the other hand, I am not sure how productive it is to define tax provisions which have been on the books for decades as "loopholes", or to suggest that provisions which have survived many Congresses and technical corrections acts (designed to fix errors on recently passed laws) and new tax acts as being outside of the "intent" of Congress. Surely the intent of Congress is considered best reflected in the laws it has left on the books, undisturbed, for years or decades.

And demonizing the "rich" should be something we all recognize as language used by politicians to justify increasing taxes on the people who already are paying the lion's share of the bills.

And those of us who have accumulated, through hard work, risk-taking, and sacrifice, sufficient funds to retire early MAY find ourselves ensnared in these provisions that supposedly target the "rich".

We are rich or aspire to be, at least in the eyes of some.

So could I gently suggest that we continue this helpful discussion while not using these loaded terms?

 

[Perryinva]

Since all my heirs would always be in a lower tax bracket than I am in, in retirement, there is no incentive to prepay taxes for Roth, except to benefit me were I to become single. I have no issues with loss of mega conversions. I believe the true wealthy do not pay their fair share.

 

[tulak]

So could I gently suggest that we continue this helpful discussion while not using these loaded terms?

I was the first to use loophole in this thread and don’t feel it’s a loaded term. Funny how that works?

I’ve enjoyed this loophole and will be sad to see it go, since I benefit from it quite a bit. I’m of the opinion that if it’s legal, then go ahead and use it. Uh oh, I did it again. [emoji2]

Of course, I could use a more PC term, but others will have issues with that too. So how about we don’t worry about the word and talk about the policy instead?

Good ideas were brought up in this thread on how to prepare if this does become law. And it still has a long way to go before that happens and if it does, who knows what it will look like.

 

[mountainsoft]

I haven't read every message in this thread, so apologies if I'm wandering off base or this has already been mentioned. However, it seems the main reasoning behind the rule changes is due to a rare few amassing large sums of money in Roth retirement accounts. So politicians see dollar signs and want to go after it.

Rather than all these individual rules to limit how money gets into the Roth, why not just set a limit and tax anything above it. For example, a Roth account might be tax free up to 10 million, then you would pay ordinary taxes on anything above that. That's not likely to affect the average middle or upper class person saving for retirement, but would limit abuses of it's intended purpose.

What difference does it make "how" the money got into the Roth, all they want is their tax income. Seems like a simple approach to me, but then the government doesn't do simple.

 

[armor99]

I think this is just going to add more layers of complexity to the tax codes.

Not that I will in my lifetime get into the "over $400k annual income" club. But as is (most) often the case with IRS "rules", that $400k cutoff today may become $200k the next time the rich aren't deemed to be paying enough. Then $100k the time after that, then soon it applies to everyone.

This is exactly correct. I guess I have never understood the thinking of some, that it is imperative to stop people from becoming “too wealthy” (and that bar continues to drop). I celebrate others people’s success. Other people’s success does not impede my own.

I guess I am just not a communist. (Many people are, and some do not even know that is what it is called). I do not think that everyone is mentally and physically about the same. And that the only way someone could ever achieve wealth is to have done something underhanded, illegal, or immoral to get there.

It bothers me a great deal to see laws written with no other purpose than to “punish the wealthy”. And by no means am I one of them. I will never have a 400k a year salary. But I can still see the danger in this sort of thinking. That just because “I” do not have that kind of salary, and it does not affect me personally, that it is ok. This type of thinking leads to really bad things happening…

 

[tulak]

I think we’ve beaten the fairness of tax policy to the limit…

How about we stick to the details of this proposal instead?

I know that would be helpful to me and others that have posted, such as the OP. It would be nice if this thread could stay open to track progress of this legislative proposal.