Contributed by: Kali Hassinger, CFP®, CDFA®
While the House just passed along the $1.2 Trillion infrastructure bill to President Biden, the final version of the Build Back Better bill is still in question. The Center has been actively monitoring this bill and how it could affect our clients’ financial lives for the last several months. Throughout that time, the contents of the bill have significantly evolved. Initially, the proposed bill seemed to include many changes that would meaningfully impact tax and income planning for many clients. Then, it seemed as though all of the individual tax consequences were off the table. Now, some of those tax features are back with, perhaps, a middle ground. Some of the highlights are outlined below, but keep in mind that this version is still up for debate and revision until this bill becomes a law!
Changes to Retirement Account Rules
- Back-door Roth IRA contributions would no longer be available. This strategy used to fund a Roth IRA, even if your income phases an individual out of the ability to make a direct Roth IRA contribution. This would no longer be available with the Build Back Better bill, but it could only affect those considered “high-income,” or defined as income above $400,000. If this is included in the final bill, great clarity can be expected on who this will impact.
- Eliminating the ability to convert after-tax 401(k) and employer retirement plan contributions to a Roth IRA.
- New contribution limits for IRA and defined contribution retirement accounts based on the account balance.
Right now, the ability to make an IRA, Roth IRA, or employer retirement plan contribution is not associated with the size of the account. Under the Build Back Better bill, account holders with retirement account balances exceeding $10 million (as of the end of the prior year) would not be able to contribute. If contributions are made, or a contribution causes the account to breach that $10 million level, a 6% excise tax would be imposed. In order to assist in tracking this kind of requirement, employers would be required to report participants with account balances above $2.5 million.
- Increase in required minimum distributions for “high-income” taxpayers whose accounts surpass that $10 million limit.
It seems as if 50% of the account balance above the $10 million thresholds would need to be withdrawn. So, if you have an $11 million IRA, you would be forced to take a $500,000 withdrawal as a required minimum distribution. Failure to complete the required minimum distribution would result in a 50% excise tax on any amount not taken.
State and Local Income Tax Deduction Cap
- The current State and Local Income tax deduction is limited to $10,000 per year. The Build Back Better bill would increase this limit to $80,000 per year.
Surcharge on High-Income Individuals, Trusts, and Estate
- For individuals, a 5% surcharge would be imposed on those with modified adjusted gross income in excess of $10 million, with an additional 3% surcharge on income above $25 million.
- For trusts and estates, the 5% surcharge would be imposed on modified adjusted gross income above $200,000, with an additional 3% surcharge on income above the $500,000 level.
The Build Back Better bill would also continue the expanded Child Tax Credit into 2022 and provide additional tax credits for those who purchase electric vehicles. Although these items are still up for debate and could change drastically before being implemented, we are staying on top of these revisions as they occur.
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.