Bill targets $10M+ retirement accounts with new distribution rules
Advisers with wealthy clients with eight-figure retirement accounts must revise their strategies under the Democratic proposal to close what lawmakers call a loophole to keep those accounts growing tax-advantaged.
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“Tax-preferred retirement accounts aren’t supposed to be a loophole for the ultra-rich to protect their enormous wealth, they’re a lifeline for working Americans who might otherwise not have a decent retirement,” Wyden said in a statement. “It’s especially alarming to see these mega retirement accounts being built at a time when half of America’s workforce has no access to a workplace retirement plan at all.”
Neal said in a statement, “Allowing a few people to accumulate massive subsidies while receiving taxpayer subsidies was never what Congress intended.”
The proposal would impose limits on mega-retirement accounts
The bill would require people with more than $10 million in retirement accounts to take distributions. More than 32,000 people had retirement accounts worth more than $10 million at the end of 2024, according to the Joint Committee on Taxation.
The proposed bill would prohibit further contributions to a traditional IRA or Roth IRA if the account holder’s combined balance between the IRA and defined contribution retirement plans, such as 401(k) plans or 403(b) plans, exceeded $10 million in the previous year.
Required distributions and the contribution limit apply to single taxpayers with a prior year modified adjusted gross income of more than $400,000 and to married taxpayers filing jointly with a prior year modified adjusted gross income of more than $450,000.
In general, if total balances exceed $10 million, the minimum distribution would be 50% of the amount by which account balances exceeded $10 million. If total balances are more than $20 million, the minimum distribution would be the lesser of:
- The amount that would make the total balance in all accounts 20 million dollars, or
- Global balance of Roth IRAs and Roth-designated accounts within defined contribution plans.
In both situations, individuals should first take distributions from Roth IRAs and then take distributions from Roth designated accounts within defined contribution plans.
The 6% excise tax on excess contributions under current law would be expanded under the bill to include contributions limited by law.
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Impact on retirement planning
Another approach, better than requiring distributions, would be to limit contributions to avoid large retirement balances, said David W. Demming, founder and president of Demming Financial Services, an Aurora, Ohio-based registered investment advisory firm. He has some $10 million to $15 million clients and said investors can have large balances in their retirement accounts if their stocks grow exponentially or by exercising options.
“I certainly don’t support someone who has cheated, the obscenely rich,” he said in an interview. “I respect playing by the rules, respecting the rules. And if you win, is that a bad deal? . . . You want to encourage the behavior of investing wisely, showing discipline and using something called the value of time.”
The proposal could affect estate and charitable planning, Demming said. Some clients may plan to leave large IRA balances to charity, questioning whether Congress intends to limit this.
READ MORE: When Roth Conversions Make Sense, and the Smart Way to Pay Taxes
Demming recommends using Roth IRAs, which allow tax-free distributions in retirement, instead of traditional IRAs, which have taxable distributions, because he believes tax rates will increase in the future.
“One of the big lies in America is when you retire … your tax bracket is going to be lower,” he said. “The tax bill may be lower, but what they are doing is adding all kinds of hidden taxes that are not called taxes.”
