Modernizing retirement has been one issue in Congress where both parties have been able to come together. In 2019 they passed the SECURE Act with bipartisan support. This year, Congress has been working on passing additional legislation called SECURE 2.0 to mandate auto-enrollment and escalation in retirement plans, expand catch-up contributions, allow Roth matching contributions, delay mandatory distributions, promote a saver's credit, authorize student loan matching, and remove barriers for life annuities.

In the wake of Congress working on two major infrastructure bills, passing the 2022 budget and raising the debt ceiling, passing SECURE 2.0 in 2021 may be difficult. The 2021 calendar may run out and SECURE 2.0 could now be pushed to 2022.

Secure 2.0 and the Build Back Better Act
However, some aspects of SECURE 2.0 have found their way into the Democrats' Build Back Better Act (BBBA), the $3.5 trillion dollar social spending bill tied to infrastructure. In the House version, they would include both the retirement plan auto-enrollment and escalation mandates and make the Saver’s Credit refundable so that those without any income tax liability are eligible to receive the benefit in the form of a contribution to their retirement account. Both are important to the retirement plan community and should expand the access to retirement savings to millions of Americans.

There is another aspect to retirement that the Build Back Better Act addresses: Mega IRAs.1 Mega IRAs are considered retirement accounts in excess of $10 million. A lot of attention has been gathering around the amount of money that some high income individuals have been accumulating in tax-deferred retirement accounts and Roth IRAs where contributions go in after tax and the distributions are tax free.

Using Mega IRAs to pay for BBBA
In an effort to find pay-fors for the $3.5 trillion bill, Congress, led by the Democrats, is using Mega IRAs to fund a portion of the package. They have introduced five modifications on the rules for retirement plans. These five are:

  1. Limiting the amount an individual can contribute to IRAs and DC plans to $10 million. Once an individual hits this number, they are prohibited from further contributions. This applies to single taxpayers making more than $400,000 and joint filers and heads of households with incomes over $450,000. The bill also requires employer-sponsored DC plans to report account balances in excess of $2.5 million to the Internal Revenue Service (IRS).
  2. It will increase the Required Minimum Distribution for IRAs, Roth IRAs, and Defined Contribution plans. When balances exceed $10 million, 50% of the account balance over the $10 million must be distributed. Also, if an individual has two or more IRAs and DC plans that exceed $20 million the Required Minimum Distribution is the lesser of the amount needed to bring the aggregate to $20 million across all accounts or the aggregate balance in just the Roth accounts. Once an individual takes the distribution needed to get the balances to $20 million, they then need to satisfy the 50% rule.
  3. The bill eliminates Roth conversations for single filers with income over $400,000 and joint filers and heads of household making over $450,000. It also prohibits all employee after-tax contributions in qualified plans and using after-tax contributions for Roth conversions.
  4. An IRA will be prohibited from holding a security if the issuer requires the IRA owner to have a minimum level of assets or income. In other words, certain alternative or private placement investments.
  5. Finally, it lowers the threshold from 50% to 10% of an IRA balance which can be invested by its owner in non-tradable investments offered on an established securities market and prevents investment in an entity of which the IRA owner is an officer.
Whether some or all of these provisions make it into the final spending bill is unknown, but it is clear that Congress has Mega IRAs in its sights. And once a revenue raiser is out of the bag in Congress, it never goes away. So if it doesn’t make it into this bill, it will probably show up in another bill looking for revenue down the road.

These provisions along with other tax provisions affecting individuals, estates and corporations are key reasons why tax planning is so important. Consult with your tax advisor on strategies and planning tools and your Natixis representative for tax planning investments.

1 Mega IRA refers to using the “mega-backdoor Roth” strategy which includes Roth IRA conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions. Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.

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