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Build Back Better Hurts IRA Savers

The House approved an amended version of the $1.75 trillion Build Back Better Act (H.R. 5376) Nov. 19 on a near party-line vote of 220-213, with one Democrat voting no.

There are many features in the bill includings limits on “mega” Roths and in-plan Roth conversions.

The legislation will now go to the Senate, where it’s possible the bill will sure to undergo additional changes.

Summary of Changes that affect IRA Account Owners

Still in the Bill:

  • Section 138301 – $10 Million Dollar limit for IRAs
  • Section 138302 – Forced distributions for IRAs over $10 Million
  • Section 138311 – Limits backdoor Roth conversions based on income thresholds
  • Section 138313 – Extends the statute of limitations to pursue violations
  • Section 138315 – For purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner is always a disqualified person. This provision would not allow Single Member LLCs where the IRA owner is the manager.

What was taken out of the bill:

  • Section 138312 stated that an investor may not use their IRA in an investment that requires the IRA owner to be an accredited investor. This was HUGE as many private placement offerings are only open to investors that meet certain criteria (such as income or accredited investor status).
  • Section 138314 affected entities that the IRA holder wished to invest in and prohibited investment if the IRA holder owned 10% (currently at 50%) or if the IRA holder was an officer of the entity (currently allowed).

Mega Roth, RMD Requirements and Back-Door Closure

The retirement-related changes within the bill’s funding section include the following.

Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances (Section 138301). To avoid subsidizing retirement savings once account balances reach very high levels, the legislation creates new rules for taxpayers with very large IRA and DC retirement account balances.

Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the contributions would cause the total value of an individual’s IRA and DC accounts as of the end of the prior taxable year to exceed or further exceed $10 million. The limit on contributions would only apply to single taxpayers (or married filing separately) with income over $400,000; married taxpayers filing jointly with income over $450,000; and heads of households with income over $425,000 (indexed for inflation). The legislation also adds a new annual reporting requirement for DC plans on aggregate account balances of at least $2.5 million. The reporting would be to both the IRS and the plan participant. These provisions would be effective for tax years beginning after Dec. 31, 2028. Note that this provision as approved in September had a Dec. 31, 2021, effective date.

RMDs for High-Income Taxpayers with Large Retirement Account Balances (Section 138302). Under this provision, if an individual’s combined traditional IRA, Roth IRA and DC account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year.

This minimum distribution would be required only if the taxpayer’s income is above the thresholds described in Section 138301 above (e.g., $450,000 for a joint return). The minimum distribution generally is 50% of the amount by which the individual’s prior year aggregate account balance exceeds the $10 million limit, reduced by the amount described in the next paragraph.

To the extent the combined aggregate balance exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in DC plans up to the lesser of: the amount needed to bring the total balance in all accounts down to $20 million; or

the aggregate balance in the Roth IRAs and designated Roth accounts in DC plans.

Once the individual distributes the amount of any excess required under this 100% distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50% distribution rule above, except that generally no amounts may be allocated to stock in a private company ESOP. These changes would be effective for tax years beginning after Dec. 31, 2028. Note that this provision as approved in September also had a Dec. 31, 2021, effective date.

Tax Treatment of Rollovers to Roth IRAs and Accounts (Section 138311). To close the “back-door” Roth IRA strategy and a similar one for retirement plans, this provision prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers and contributions made after Dec. 31, 2021.

The bill also eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.

Statute of Limitations with Respect to IRA Noncompliance (Section 138312). The statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions would be expanded from three years to six years. This provision applies to taxes to which the current three-year period ends after Dec. 31, 2021.

IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules (Section 138313). For purposes of applying the prohibited transaction rules with respect to an IRA, the bill clarifies that the IRA owner (including an individual who inherits an IRA as a beneficiary after the IRA owner’s death) is always a disqualified person. This provision applies to transactions occurring after Dec. 31, 2021.

Sample Letter to Your Congressional Representative

RE: Please oppose all retirement changes that affect IRA Savers

The Honorable [Your Representative]
United States House of Representatives
Washington, D.C. 20515

Dear Representative [Last Name],

I am a voting citizen (and a constituent of yours), and I am writing to share my deep concern over recent legislation in Build Back America, in particular, Subtitle 1, Part 3, as it relates to IRA accounts.

  • Section 138301 – $10 Million Dollar limit for IRAs
  • Section 138302 – Forced distributions for IRAs over $10 Million
  • Section 138311 – Limits backdoor Roth conversions based on income thresholds
  • Section 138313 – Extends the statute of limitations to pursue violations
  • Section 138315 – For purposes of applying the prohibited transaction rules with respect to an IRA

I believe this effort is a reactionary over-correction to a few high-profile IRA account holders. With the proposed changes, a whole set of individuals and business entities get caught in a web that seems to have its sights set on penalizing the ultra-rich. I am not ultra-rich, and this is going to affect me directly.

I would like to know if you support this section of the proposal as it relates to changes to IRA accounts?

I am an IRA saver and legislation that limits IRAs will ultimately affect me. I like to invest in opportunities that are familiar to me. I do not want the rules changed on me this far down the road. It limits how I can diversify, putting me at the mercy of a limited set of options for my IRA investment choices.

I ask you to remove all sections of this bill affecting IRA accounts, but in particular, sections 138301, 138302, 138311, 138313 and 13831 of the Build Back America passed bill.

Thank you for all you do, and in particular, thank you for listening to those of us middle-of-the-road, long-time investors who stand to be taken down in what looks to be an attack on the uber-rich.

I will also send you a thank you note when I receive notice that you set this proposal straight with a strikeout of the IRA section.

I can be reached via [your email address].

Respectfully submitted,

[Your Name]
[Your Address]

This bill is reactionary and seeks to punish a small percentage of individuals who have grown their IRA to large amounts. What it does not account for is the average, everyday investors who are choosing to Self-Direct and who are not uber-rich. This sweeping legislation punishes thousands of unintended victims in its pursuit of a few outliers who have grown their retirement accounts above what the government thinks is reasonable.

Midland does not support these provisions in any way, specifically the restrictions on limiting accredited investments. This bill would eliminate the ability to invest in most private placements and require current investors to remove their IRA stake in these holdings within 2 years. Midland feels that Americans should be able to make their own investment decisions and not be forced into mostly Wall Street assets.

We recommend clients write a letter to their legislators and specifically anyone on the House Ways and Means Committee. We have drafted templates (below) for you to copy and paste and we have provided a link for you to find the email for your elected officials.

If we learn any additional information, we will post to this page.

Don’t let Congress eliminate self-directed IRAs

The benefits of IRA investing into private assets include:

  1. The taxpayer has increased choice for investments
  2. Accredited Investors are qualified individuals that understand complex transactions
  3. Additional cash from IRAs increase the credit risk of the assets
  4. IRA investing help generate jobs, income, and value add to the economy
  5. Encourage more efficient employment of capital via IRAs

Please contact your Congressional representative today.