6 Ways Democrats Plan to Change Retirement Account Rules

As Congress continues to hammer out the details of the multi-trillion-dollar infrastructure spending package, its potential impact on American retirement plans is coming into focus.

While much of the ongoing work on the legislation involves tax provisions that likely won’t affect the typical person in or approaching retirement, certain changes are more likely to have an impact on retirement accounts as early as next year.

Here’s a look at current proposals in the Build Back Better Act, as it’s now known, that would affect IRAs, 401(k) plans and other types of retirement accounts, based on the summary released this week by the House of Representatives.

1. No more Roth conversions for high-earners

Converting a traditional individual retirement account (IRA) to a Roth IRA is one strategy to avoid future taxes — essentially, you pay taxes on the converted amount upfront, and then avoid paying taxes on future withdrawals so long as you follow IRS rules governing IRAs.

However, the current version of the new bill would close off this option to some taxpayers. If it became law, these groups would no longer be able to convert IRAs or employer-sponsored plans like 401(k)s to Roth accounts:

• Single filers with taxable income over $400,000
• Married people filing separately with taxable income over $400,000
• Married people filing jointly with taxable income over $450,000
• Heads of household with taxable income over $425,000

These numbers would be indexed to inflation, meaning they will increase over time.

This provision would take effect in the 2032 tax year.

2. No more Roth conversions for after-tax contributions

The bill also would prohibit the following from being converted to a Roth:

• All employee after-tax contributions in qualified plans
• After-tax IRA contributions

This provision would apply to anyone who makes after-tax contributions, regardless of their income level, and would take effect in 2022.

3. Crackdown on self-interested IRA investments

Current law restricts IRA owners from “self-dealing” — investing their IRA assets in corporations, partnerships, trusts or estates that they have a 50% or greater stake in.

This bill would lower that threshold to 10% and make it more difficult in other ways to invest in companies you have a substantial interest in.

This change generally would take effect for the 2022 tax year, although there is a transition period for people who already own this type of investment.

4. New reporting requirement for high-value workplace retirement plans

The bill would create a new annual reporting requirement for defined-contribution plans, such as 401(k) and 403(b) plans, with total account balances of more than $2.5 million.

The balance of an affected plan participant (meaning the employee covered by the plan) would be reported to both the IRS and the participant.

This change would take effect starting in the 2022 tax year.

5. New contribution limit for high-earners with large balances

Another section of the new bill generally would prevent contributions to Roth and traditional IRAs if your IRA and defined-contribution accounts are worth more than $10 million in total at the end of the prior taxable year.

This limit would apply to:

• Single filers with taxable income over $400,000
• Married people filing separately with taxable income over $400,000
• Married people filing jointly with taxable income over $450,000
• Heads of household with taxable income over $425,000

As with the Roth conversion rules for high-earners, these income thresholds would be indexed to inflation.

This change would take effect in 2022.

6. New RMDs for high-earners with large balances

Generally, at age 72 you need to start taking required minimum distributions (RMDs) from your retirement accounts. This amount is calculated using an IRS formula that considers your account balance and life expectancy.

Under the changes proposed in this bill, people who have combined IRA and defined-contribution account balances of more than $10 million at the end of a taxable year, and whose income hits the thresholds above, would have a new RMD, regardless of their age.

The amount of this RMD would generally be equal to 50% of the amount by which their combined balance exceeds $10 million. For example, if that combined balance was $10,100,000 — $100,000 more than the $10 million limit — the RMD would be $50,000.

An even larger RMD would be required for combined balances that exceed $20 million.

What about pensions?

If you have a defined-benefit plan, meaning a traditional pension plan, you can rest easy, at least for now.

It appears that none of the above changes would apply to traditional pensions: The summary of the retirement account provisions of the Build Back Better Act that was released this week makes no mention of defined-benefit plans.