House Democrats propose new retirement plan rules for the rich, including contribution limits and a repeal of Roth conversions

Contribution limits

Current law lets taxpayers make IRA contributions regardless of account size.

However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined IRA and defined-contribution plan exceeds $10 million. A defined-contribution plan is a 401(k) plan or other similar workplace savings plan.

The policy’s purpose would be “to avoid subsidizing retirement savings once account balances reach very high levels,” according to a proposal outline.

That limit would apply to single taxpayers with more than $400,000 of taxable income. The threshold would be $450,000 for married taxpayers filing jointly and $425,000 for heads of household.

RMDs for ‘mega’ IRAs

Individuals whose combined traditional IRA, Roth IRA and defined-contribution retirement accounts exceed $10 million at year’s end would have to withdraw at least 50% of the excess the following year.

Those with account totals exceeding $20 million must pull from Roth IRAs and 401(k) plans first.

These new required minimum distributions for mega IRAs would only be required for savers whose taxable income exceeds the same thresholds identified above for the contribution limits.

Backdoor Roth

There are income limits to contribute to Roth IRAs. In 2021, single taxpayers can’t add money to such accounts if their income exceeds $140,000.

But current law allows for “backdoor” contributions to Roth IRAs. That can be achieved by converting a traditional IRA or Roth 401(k) account, which don’t carry income limits. There are income limits that determine whether contributions to traditional IRAs are tax-deductible or not.

Savers pay tax on the conversions, but their future investment growth and retirement distributions are tax-free.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans such as 401(k) plans.

The policy would apply at the same income thresholds listed above. It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.

Mega backdoor Roth

The so-called “mega-backdoor Roth” strategy uses a principle similar to that of the backdoor Roth.

The strategy lets high earners save up to $58,000 in a 401(k) plan — more than the traditional $19,500 contribution limit — using a type of after-tax 401(k) bucket. Savers then convert that savings to a Roth account, once again yielding the benefit of tax-free investment growth.

Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account.

This policy would apply for everyone, regardless of income level.