Are you ready for some retirement plan changes when it comes to taxes?
As part of the push to make tax codes more equitable, the House Ways and Means Committee proposed changes for retirement plan rules.
The proposed plan conjures images of Robin Hood – stealing from the rich and giving to the poor. The purpose of the changes? Stop the wealthy from using retirement accounts as a perceived tax shelter. And help the low- and middle-income folks to use it as a nest egg.
These changes may not apply to many people in your company. But they’re important to give a heads up to the employees who are in this group.
Taxpayers can contribute what they want to their IRA, under current law, irrespective of the amount already saved in their account.
To avoid subsidizing retirement savings when account balances are very large, lawmakers have proposed new rules for these taxpayers. The new legislation prohibits additional contributions to a Roth or traditional IRA for a taxable year if the total value of a person’s IRA and defined contribution retirement accounts exceeds $10 million. They’d also be required to withdraw 50% of the balance that exceeds $10 million.
For those accounts over $20 million, they’d be required to withdraw 100% of anything over $20 million so that the ending balance is below $20 million and the aggregate balance of their Roth accounts. Also, income tax would need to be paid on the withdrawn amount every year.
The limitation would apply to:
- single taxpayers or those married and filing separately with taxable income over $400,000
- married taxpayers filing jointly with taxable income over $450,000, and
- heads of households with taxable income over $425,000.
If the new rules pass, no taxpayer – no matter their income – can convert after-tax contributions made to qualified retirement plans or IRAs to a Roth account or Rother IRA after Jan. 1, 2022.