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Social and climate costs bring back IRA proposals

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Social and climate costs bring back IRA proposals

The House of Representatives released another revision to their social and climate spending bill as they prepare for a vote. Democrats in the House have been blocking passage of the $1 trillion infrastructure bill that passed the Senate until there’s a vote on the social and climate package. Passage of the social and climate package would result in the progression of the bill to the Senate. There will likely be additional changes once it reaches the Senate. These changes may require another House vote. 

A summary of the original proposals potentially impacting IRA/Roth IRAs and other types of retirement plans was previously published on Sept. 29, 2021. These proposals were removed entirely from an interim bill, but the latest re-write has added back certain IRA/Roth IRA provisions, as negotiations continued with some of these changes now having a later effective date. A summary of what is included and what remains removed is provided below.

What IRA/Roth IRA changes are back in?

  • Contribution limits for high-income taxpayers (taxpayers with income above specified thresholds) that also have applicable retirement accounts with an aggregate vested balance in excess of $10 million. The effective date for this limitation would now be tax years beginning after Dec. 31, 2028.
  • An additional required minimum distribution (RMD) requirement for high-income taxpayers if the individual has applicable retirement accounts with an aggregate vested value in excess of $10 million. The effective date for this provision would now be tax years beginning after Dec. 31, 2028.
  • Conversion of after-tax amounts from either an IRA or retirement plan to a Roth IRA or Roth designated account would not be allowed for tax years beginning after Dec. 31, 2021. In addition, conversions to Roth IRAs by high-income taxpayers would be prohibited from both IRAs and retirement plans for tax years beginning after Dec. 31, 2031.
  • Prohibited transaction rules under section 4975 clarify that the IRA owner is always a disqualified person and the statute of limitations for valuation related misreporting or prohibited transactions would increase to six years. These provisions would be effective for transactions occurring after Dec. 31, 2021.

What was removed?

  • The previous version included rules prohibiting IRAs or Roth IRAs from investing in certain assets that was not added back to the most recent version of the bill. The original Ways & Means language included the prohibition on investments for which the issuer requires a specified minimum amount of income or assets, education level, or specific licenses or credentials. It also prohibited investments in non-publicly traded companies for which the IRA owner holds a 10% or greater interest.

RSM insights:

The current political landscape has proven to be challenging for lawmakers. The overall impact of these provisions making their way back in would hit some high-income taxpayers but provide a longer time frame for planning before the contribution and RMD restrictions take effect. While the current version does not include the prohibition on an owner of a company owning company shares in his or her IRA, even the prohibited transaction rules currently in the Internal Revenue Code can make it difficult to get ownership of an owner’s company into the owner’s or other family member’s IRA or Roth IRA. In addition, even under the current Code rules there are valuation issues to be considered. Some care needs to be taken before trying to have an IRA or Roth IRA invest in a company with family ownership or other relationships to the IRA owner.   

It is likely that additional revisions will be made before this bill becomes enacted law. RSM will provide further updates as they become available.

RSM CONTRIBUTORS


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