My last blog article discussed how the $3.5 trillion budget proposal contains a provision requiring employers with 5 or more employees to offer a payroll deduction IRA program or salary reduction 401(k) plan to employees and automatically deduct 6% of their pay and contribute it to such plan or face penalties, effective January 1, 2023. See Could CalSavers Go National? Federal Mandated Payroll Deduction Plan Proposal Included In 3.5 Trillion Budget Proposal. That proposal passed the House Ways & Means Committee on September 9, 2021. The reasoning for the provision was that not enough Americans have saved enough for retirement. According to a 2019 U.S. Government Accountability Office report, nearly half of people aged 55 or older have nothing saved for when they stop working.
On September 15, the Committee approved provisions limiting how much those who do save for retirement can save as revenue raising provisions for the budget proposal. These include:
- Contributions Limit. Prohibiting further contributions for individual retirement plans (IRAs) or Roth IRAs for individuals who earn too much income and with combined account balances in excess of $10 million in IRA and Defined Contribution (DC) plans. The income thresholds are for: single filing taxpayers, or married taxpayers filing separately, taxable income over $400,000; married taxpayers filing jointly, taxable income over $450,000; and heads of household filers, taxable income over $425,000.
- Minimum Distribution. Requiring a minimum distribution of 50% of the amount by which an individual’s prior year combined traditional IRA, Roth IRA and DC plan account balances exceed $10 million.
- Back-Door Conversion. Eliminating Roth conversions for both IRAs and employer-sponsored plans for: single filing taxpayers, or married taxpayers filing separately, with taxable income over $400,000; married taxpayers filing jointly with taxable income over $450,000; and heads of household filers with taxable income over $425,000.
- Investment Prohibitions. Prohibiting an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential. Another provision prohibits investment of IRA assets in entities in which the owner has a substantial interest. This would eliminate the attractiveness of many self-directed IRAs.
- Prohibited Transactions. Clarifying that IRA owners (even owners of inherited IRAs) are disqualified persons for purposes of the prohibited transactions rules.
The Joint Committee on Taxation estimates that these tax changes would raise approximately $2.1 trillion over 10 years to help pay for the budget reconciliation bill. The provision eliminating the Back-Door Conversion would not be effective until 2032 but the remaining provisions would be effective next year. These provisions will now go to the House Budget Committee and added to other proposals as part of the reconciliation process, and those approved would move to the full House of Representatives.
Again, this is still proposed legislation and it is not clear whether these provisions will become law. Together, these provisions and the mandated plan provision clearly are an attempt to close the gap in retirement savings between the classes.