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As we said in our article on Congressman Neal’s (D-MA) auto-IRA/auto-plan proposal, throughout 2024 we will be covering policy initiatives whose fate may turn on November’s election. In this article, we briefly review two proposals (capping large account balances and closing the door on “back door” Roth conversions) in President Biden’s fiscal year 2025 budget that directly affect tax qualified retirement plans and then discuss the effect of President Biden’s broader tax proposals (increasing the corporate tax and raising taxes on “high-income earners”) on retirement savings tax incentives.
Special distribution rules applicable to high-income taxpayers with large retirement account balances
Under this proposal:
“High-income earners” (defined as taxpayers with adjusted gross income over $450,000/$400,000 (joint/single filers)) with total vested account balances in “tax-favored retirement arrangements” exceeding $10 million in a year would have to distribute at least 50% of the excess. Tax-favored retirement arrangements include tax qualified defined contribution plans, 403(b) plans/contracts, 457(b) arrangements, and IRAs.
Where the total in these accounts exceeds $20 million, at least the lesser of that excess, or the total in Roth IRAs and Roth DC accounts, would have to be distributed from Roth IRAs and Roth DC accounts.
Contributions to tax favored accounts by taxpayers with accounts over $10 million (and contributions that would take account totals over $10 million) would be treated as excess contributions subject to a 6% excise tax.
DC plan administrators would be required to annually report to IRS, and to the participant, balances over $2.5 million.
As this proposal would only apply to defined contribution plans, its adoption would increase the attractiveness of defined benefit plans for certain sponsors.
Limit rollovers and conversions to designated Roth retirement accounts or to Roth IRAs
This proposal would prohibit rollovers by high-income earners from non-Roth accounts to Roth IRAs. It would also generally prohibit rollovers to Roth IRAs from non-Roth accounts “if any part of the distribution includes a distribution of after-tax contributions.”
Both of these proposals generally track proposals included in early versions of the Build Back Better Act, considered (but not passed) by Congress in 2021.
Broader tax proposals
The FY2025 budget also includes increases in the corporate tax, the highest marginal personal income tax rates, and the 3.8% “Medicare tax” on net investment income, as follows:
The corporate tax rate would be increased from 21% to 28%.
The tax rate high-income earners would be increased to 39.6%.
The “Medicare tax” on net investment income would be increased from 3.8% to 5% for taxpayers earning over $400,000.
Each of these proposals would, if adopted, increase the value/appeal of (in terms of tax deductions and avoidance of taxation on investment earnings) current retirement savings tax incentives.
Outlook
It is conceivable (but unlikely) that the proposed $10 million cap on retirement savings balances or the limitation on rollovers might get some bi-partisan support as revenue raisers in non-tax legislation (e.g., another “infrastructure” bill). The tax increases will not get any bi-partisan support in this Congress, but, if Democrats win back control of the House of Representatives, could be an element of a 2025 tax bill.