Proposed IRA Restrictions in House Budget Reconciliation Amendment

The House Ways and Means Committee has released additional legislative text as part of its tax portion of the anticipated $3.5 trillion budget reconciliation bill. If enacted, the proposal would impose several restrictions on IRAs.

• Creates a prohibition on Roth or Traditional IRA contributions if aggregate IRA and defined contribution balances exceed $10M, and generally applies to individuals making more than $400–$450k (depending on filing status)
• For account balances exceeding $10M, provides for a required distribution equal to 50 percent of the amount by which the prior year aggregate balance exceeds $10M—again, for individuals making more than $400–$450K. If the aggregate value exceeds $20M, then the excess is required to be distributed first from Roth IRAs and designated Roth accounts to bring the value to $20M (or deplete Roth assets) after which the individual can choose which accounts to distribute from to satisfy the remaining RMD resulting from having a balance exceeding $10M.
• Closes the “back-door” Roth loophole by eliminating conversions of all after-tax IRA and after-tax employer plan contributions
• Eliminates pretax conversions and rollovers to Roth from non-Roth accounts for those making $400–$450k (beginning in 2032)
• Extends statute of limitations from three years to six years after a return containing an error was filed to allow IRS to pursue IRA noncompliance

The legislation also imposes restrictions on certain types of investments as follows. Such investments that exist in IRAs at the time of enactment would be required to be divested from the IRA by December 31, 2023.

• Prohibits 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
• have a specified minimum amount of income or assets,
• have completed a specified level of education, or
• hold a specific license or credential
• Prohibits investment of IRA assets in entities in which the owner has a substantial interest (10 percent or more) or is an officer or director of the entity. Constructive ownership of family members applies (spouse, ancestor, lineal descendant, and spouse of lineal descendant).

Other retirement provisions included in the Ways and Means Committee’s portion of the bill were announced last week. After nearly 40 hours of debate and 66 amendments over the course of four days, the legislation was approved by the Ways and Means Committee in a near party-line vote. It now moves to the House Budget Committee for markup.