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New Legislation Proposed: Potential Impact on Taxes and IRAs

On September 13, 2021, the House Ways and Means Committee released additional tax proposals in its budget reconciliation legislation that is being considered by Congress. There are many steps to the process before any legislation becomes law, but, if enacted, the proposals present significant changes to the laws governing IRAs, including what types of assets can be invested within an IRA, as well as added restrictions and limitations. You can find the proposed text here.

Some, but not all of the provisions that could significantly impact clients holding IRAs, advisors and investment sponsors are as follows:

  • Prohibition of IRA Investments Based Upon Account Holder’s Status: Prohibits the investment of IRA assets in a security if the issuer of the security (or other person specified by the Treasury Department) requires the account owner to either represent to the issuer that the account owner:
    • has a specified minimum amount of income or assets,
    • has completed a specified level of education, or
    • holds a specific license or credential

For example, the legislation would prohibit IRAs from holding unregistered investments that are offered to accredited investors, such as equity investments in small businesses.

  • Prohibition of Investment of IRA Assets in Entities in Which the Owner Has a Substantial Interest: Prohibits the investment of IRA assets in entities in which the IRA owner and related entities owns more than a 10 percent interest or is an officer or director of the entity, regardless of the ownership percentage.

****Both of these provisions preclude investments that exist in IRAs at the time of enactment would be required to be “transitioned” from the IRA by December 31, 2023, meaning that IRA owners would need to sell, liquidate or distribute in-kind from their IRA by no later than December 31, 2023.

  • Contribution Limits: Contribution limit on Roth or Traditional IRA contributions if the aggregate IRA and defined contribution balances exceed $10 million. This cap generally applies to individuals making more than $400–$450k (depending on the owner’s filing status)
  • Increase in Minimum Required Distributions for High-Income Taxpayers with Large IRA Balances: For account balances exceeding $10 million, the provision provides for a required distribution equal to 50% of the amount by which the prior year aggregate balance exceeds $10 million for individuals making more than $400–$450K. If the aggregate value exceeds $20 million, then the excess is required to be distributed first from Roth IRAs and designated Roth accounts to bring the value to $20 million (or deplete Roth assets). Then, the individual can choose which accounts to distribute from to satisfy the remaining RMD resulting from having a balance exceeding $10 million.
  • Roth IRAs and Conversions: Closes the “back-door” Roth by eliminating conversions of all after-tax IRA and after-tax employer plan contributions and eliminates pre-tax conversions and rollovers to Roth from non-Roth accounts for those making $400–$450k (beginning in 2032).

What Are We Doing?
Since the rollout of these amendments, Equity Trust has taken a proactive role in building a coalition with others in the retirement industry, retaining counsel in Washington to ensure that the lawmakers understand the serious and unintended consequences of these amendments on our clients. We will continue to work with lawmakers to ensure that they understand the harmful effects that these changes will have on the ordinary investor. Know that, as always, we will continue to be a strong advocate of investor choice. We also want you to feel secure in knowing that Equity Trust Company is well-positioned to continue to succeed, no matter the outcome of the proposed legislation.

We will continue to monitor the proposed legislation and update this website as these proposals make their way through the process. Please continue to check back for updates.