As the Build Back Better Act continues to unfold, more proposals are being revealed to the public – and many major changes are expected to become law.  And one area expected to be highly impacted is retirement accounts for high net-worth individuals.

Who’s impacted – and how?

As stated above, the proposals only impact high net-worth individuals – specifically, those with a filing status of single, head of household, or married filing jointly that earn $400K000, $425,000, and $450,000, respectively.

Additionally, these same individuals must also have retirement account balances that exceed $10 million dollars. One item to note is that this considers the aggregate of all retirement accounts such as any 401(k) accounts, IRAs, 403(b) accounts, etc.  As for individuals with accounts that exceed $20 million, special rules apply – we’ll talk about that in a minute.

What, exactly, are the impacts?

A significant change in the proposals focuses on a new Required Minimum Distribution (RMD).  Individuals with retirement accounts valued at more than $10 million would now be required to take an RMD for 50% of the account balance that is over $10 million.

Higher stakes for higher account balances

Now the rules get a bit more granular for those with retirement accounts with more than $20 million. For those that fall into this category, the excess amount must first be distributed from Roth accounts up to the lesser of:

1) the amount needed to bring the aggregate balance down to $20 million, or

2) the aggregate balance in all Roth accounts.

So what does that look like?

Let’s look at an example. Let’s say Taxpayer C has an IRA and 401(k) accounts with an aggregate account balance of $20,500,000. Taxpayer C also has $500,000 in a Roth account. Under the proposed new rules, Taxpayer C’s new RMD would be $5,500,000 ($500,000 Roth IRA RMD + 50% of the aggregate balance over $10 million).

If Taxpayer C had Roth amounts less than $500,000, then those Roth amounts must be distributed in full plus the new 50% of the excess over $10 million.

Other items to consider

As mentioned earlier, the new legislation is still a work in progress with many moving parts – so a lot of things can change. Some other aspects of the proposals to consider are:

  • Companies with defined contribution plans would be required to report to the IRS all balances over $2.5 million
  • Roth conversions for IRAs and 401(k)s would be eliminated if income exceeds thresholds mentioned earlier
  • After-tax IRA and employer plan contributions are eliminated from being converted to Roth accounts for income levels
  • IRAs will no longer be allowed to hold unconventional assets or alternative investments through accredited investor status
  • All changes have a proposed effective date of 2029, except for “backdoor” Roths which are projected to be eliminated in 2022

Contact Us

Planning for retirement is critical for a successful future – and making sure you’re optimizing your tax exposure is a key part of that planning. Proper planning can save individuals a significant amount of money – and create greater peace of mind. Connect with one of our high-net-worth specialists today to help you plan for a better tomorrow. We’re here to help.