09/14/2021
Thank you, John M Hyre III, on your summary of this proposed bill. Let's hope this bill does not pass, as it could hurt alot of investors.
John M Hyre III:
More tax changes in proposed House bill, looks they apply in 2022. The proposals include some pretty bad news for IRA’s & 401k’s. At least they did not ban self-direction outright or require appraisals to buy assets. But they are taking away a lot.
First, they are proposing a limit on how much high-income individuals can contribute to IRA's, 401k's, and other defined contributions plans if they have $10M+ in them. This limit is on total plan balances per person, and not per plan. Here's the language from the Congressional explanation:
"Specifically, the legislation prohibits further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. The limit on contributions would only apply to single taxpayers (or taxpayers 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).
The legislation also adds a new annual reporting requirement for employer defined-contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service and the plan participant whose balance is being reported. The provisions of this section are effective tax years beginning after December 31, 2021.”
On its own, the above is not so bad, just a limit on contributions. But they also require minimum distributions (RMD’s) of half of any amount over $10M (e.g., $11M in total balances = $500k RMD) if one is over the $400k (or so) income threshold for that year.
To the extent that the combined accounts are $20M+ per person, then the RMD is the amount needed to get down to $20M AND must come from the Roth accounts. Once the balance is down to $20M, then the taxpayer may decide from which accounts the RMD’s come from.
Again, not so bad, at least not until hyper-inflation hits. Then maybe $10M will not seem like a very large amount.
Here’s where it gets quite ugly.
Converting from Traditional to Roth in IRA’s, 401k’s, and other plans is banned if the taxpayer makes circa $400k+ in a given year. In addition, ALL Roth contributions are prohibited in 401k’s and other employer-sponsored plans starting in 2022. ALL After-tax IRA amounts are prohibited from converting to Roth, regardless of income levels.
Another heavy blow: IRA’s are not allowed to invest in anything based on the account holder’s status. For example, any investment that requires an investor to be accredited is banned for IRA's. Bye-bye IRA investments in most PPM’s (you have to years to get out of those investments)! This will put a huge hole in self-directed IRA investing. The provision does not appear to apply to 401k’s at present. Pray they do not amend the proposal to include 401k’s. I think this requirement should spark a major letter-writing campaign to Congress.
Here’s the Congressional explanatory language of the above:
“The bill prohibits 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. For example, the legislation prohibits IRAs from holding investments which are offered to accredited investors because those investments are securities that have not been registered under federal securities laws. IRAs holding such investments would lose their IRA status. This section generally takes effect for tax years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already holding these investments.”
This info is based on the summaries. I need to read the language of the law itself. I think these anti-IRA/401k provisions will survive the negotiation process. Better get those Roth conversions and contributions done before 2022!
Here’s more on non-IRA/401k issues:
Cap gains on Section 1202 stock are presently 100% excluded once the stock is held for 5 years. That will be reduced to 50% for those who make over $400k in a given year. Meaning: Those who create successful start-ups will be taxed harder.
QBI/Pass-Thru Deduction to be limited for those making over $400k. I need to dig into the details. Not a surprise.
Gift & estate tax credit will drop from $11M to $5M per person, apparently effective immediately, still need to confirm that.
This is a big one: Grantor trusts get included in the taxable estate. That means estate planning is going to change, cost more, and be less flexible.
Another big one: Transfer (presumably means "gifting") of non-business assets (that definition will be important) will not receive a discount for transfer tax (i.e. - gift tax) purposes (e.g., no discount for lack of liquidity or control when transferring shares of LLC's and the like). The discount rules presumably still apply to Traditional to Roth conversions (more on that shortly), need to dig into the details.
