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House Democrats on Monday proposed a series of changes to retirement accounts for the rich as part of a tax law reorganization tied to a budget of $ 3.5 trillion.

In conclusion, Democratic reforms aim to undermine the use of retirement accounts as supposed tax protection for the rich and instead encourage them as a way for low- and middle-income Americans to build a nest egg.

Most of the changes would start in 2022.

Wealthy people with retirement accounts of more than $ 10 million would be prohibited from contributing additional savings and would have a new minimum payout required each year, according to a draft tax law presented Monday by the House Ways and Means Committee.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401 (k) -type plans for those who earn more than $ 400,000 a year. It would also prevent savers from using the “mega-backdoor Roth” strategy regardless of income level.

In addition, legislation would prohibit individual retirement accounts from holding investments that require buyers to be accredited investors, a status generally reserved for wealthy investors.

The proposals are part of a broader theme of raising taxes for those who make more than $ 400,000 a year to help fund education, climate, paid vacation, childcare and other measures, while also making tax laws fairer.

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They are also following Democratic outcry following a recently released ProPublica report that Peter Thiel, a PayPal co-founder, owns a Roth IRA, which grew to $ 5 billion in 2019, up from less than $ 2,000 in 1999 .

“IRAs are designed to provide old-age security for middle-class families and not allow the super-rich to pay taxes,” said Senator Ron Wyden, D-Ore., Chairman of the Senate Finance Committee, in July following a data release showing that growth of “mega” IRAs.

The Democrats have narrow leeway to pass a bill, which they want to achieve with a simple majority through a budget balancing maneuver.

The Republicans are firmly against it. Rep. Kevin Brady, R-Texas, senior member of the Ways and Means Committee, called the spending “the greatest welfare state expansion of our lives” during a hearing on Thursday and said it was “a waste of hard-earned tax dollars.” “

Contribution limits

Current law allows taxpayers to make IRA contributions regardless of account size.

However, legislation would prohibit individuals from making more contributions to a Roth IRA or a traditional IRA if the total value of their combined IRA and defined contribution plan exceeds $ 10 million. A defined contribution plan is a 401 (k) plan or other similar savings plan in the workplace.

The purpose of the policy is to “avoid subsidizing retirement provision once account balances reach very high levels,” says a draft proposal.

This limit applies to single taxpayers with taxable income greater than $ 400,000. The threshold would be $ 450,000 for married taxpayers and $ 425,000 for heads of household.

RMDs for “mega” IRAs

Individuals whose combined traditional IRA, Roth IRA, and defined contribution retirement accounts at year-end exceed $ 10 million would be required to withdraw at least 50% of the excess in the following year.

Those with an account balance greater than $ 20 million must first withdraw from Roth IRAs and 401 (k) plans.

These new required minimum distributions for mega-IRAs would only be required for savers whose taxable income exceeds the thresholds mentioned above for the contribution limits.

Backdoor Roth

There are income limits for contributing to Roth IRAs. In 2021, single taxpayers will not be able to add money to such accounts if their income exceeds $ 140,000.

But current law allows “back door” contributions to Roth IRAs. This can be achieved by converting a traditional IRA or Roth 401 (k) account that has no income limits. There are income limits that determine whether or not contributions to traditional IRAs are tax deductible.

Savers pay tax on the conversions, but their future investment growth and pension distributions are tax-free.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans such as 401 (k) plans.

The directive would apply at the same income thresholds as listed above. It applies to distributions, transfers and deposits made in tax years beginning on December 31, 2031.

Mega back door Roth

The so-called “Mega Backdoor Roth” strategy uses a principle similar to that of Backdoor Roth.

The strategy allows high earners to save up to $ 58,000 on a 401 (k) plan – more than the traditional contribution limit of $ 19,500 – with some sort of 401 (k) after-tax bucket. Savers then convert these savings to a Roth account and benefit again from tax-free investment growth.

Democratic legislation would end the Roth mega backdoor by banning all post-tax contributions in workplace plans and prohibiting the conversion of after-tax IRA contributions into a Roth account.

This policy would apply to everyone, regardless of income level.

Accredited Investors

Democratic legislation would prohibit IRA investments that require the owner to have a minimum wealth or income, or have completed a minimum education, or acquired a specific license or rating.

For example, this would apply to accredited investors looking to buy a private asset.

IRAs with these investments would lose their IRA status – meaning they would lose their tax benefits.

These rules would apply from 2022, but there would be a two-year transition period for IRAs who are already holding these investments.