Retirement proposals in the Administration’s FY2024 budget

On March 9, 2023, the Administration released its Fiscal Year 2024 Budget. The related General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals included a description of “modifications to rules relating to retirement plans” consistent with, for the most part, proposals that were, at one point, part of the Administration’s 2021 “Build Back Better” proposal.

While it is unlikely (with a Republican-controlled House) that these proposals will become law in the current Congressional Session, they are revenue-raisers and address issues that have (for some policymakers) been a target of concern.

In this note, we very briefly review two of the Administration’s proposals: a $10-$20 million cap on account-based accumulations, and the elimination of certain “Roth conversions,” for certain high-income taxpayers.

Cap on large account balances

The proposal would require that a “high-income taxpayer” with aggregate retirement account balances (in tax-qualified defined contribution plans, 403(b) contracts, eligible State 457 plans, and IRAs) in excess of $10 million (determined as of the last day of the preceding year) to distribute 50% of the excess. In addition, contributions to any of these accounts for the year would be counted towards the excess and would generally be subject to a 6% excise tax.

If the aggregate amount under tax-favored retirement accounts exceeds $20 million, then the minimum amount distributed must be at least the lesser of (1) the excess over $20 million and (2) the amount(s) held in any Roth IRA or a retirement plan Roth account.

“High-income taxpayers” are defined as taxpayers with modified adjusted gross income over $450,000 (joint filers)/$425,000 (heads-of-households)/$400,000 (individuals). Affected taxpayers could choose which accounts to take the distribution from, except that where the “over $20 million” rules apply, the minimum distribution must come from Roth accounts.

Failure to comply will be treated as a violation of the required minimum distribution (RMD) rules, subject to a 25% excise tax.

Plan administrators would have to report account balance information on participants with account balances in excess of $2.5 million to IRS.

These rules would generally be effective beginning in 2024.

Limit on Roth conversions

Under current rules, taxpayers may in some circumstances be able to avoid the income limits on Roth IRA contributions by rolling over non-Roth after-tax plan contributions into a Roth IRA, “converting” those contributions to Roth tax treatment. Under the proposal, with respect to high-income taxpayers (as defined above), only distributions from a plan’s Roth account could be rolled into a Roth IRA. And only amounts from (another) plan’s Roth account could be rolled into a plan’s Roth account.

These rules would generally be effective beginning in 2024.

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A few observations: As we said at the top, passage of these proposals in the current Congress is very unlikely. But, the Roth conversion issue is technical, and these conversions are vulnerable to attack as a “gimmick.” And targeting large retirement account balances has some populist appeal, has had the support of Democrat policymakers for some time, and is likely to persist beyond the next election. Finally, we note that the aggregate retirement account balance cap does not apply to defined benefit plan accumulations. DB annuities present complex valuation issues that do not lend themselves easily to the dollar-limit caps Democrat Administrations have supported (now and in the past).

We will continue to follow these issues.

This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com.    The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.   Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.