New Roth IRA Rules?

What seems more important than these changes is the reaction to the proposed changes to IRAs and Roth IRAs, as if some of those writing about investment changes fear a domino-like effect of changes to other investment products coming.

At first, it might sound like the changes proposed to Roth IRAs over September 2021 and October 2021 are cause for a lot of concern by many investors. Your clients may already be peppering you with questions. A quick dive into those proposed changes, and the legislative method by which they were proposed to be effectuated, might slow your roll on the panic party.

The proposed change to certain Roth IRA’s is buried in an expenditure bill that is 881 pages long. Sure it’s large print, but even the most caffeinated among us is not likely to dig out the exact language and read it for ourselves. Instead, we tend to read summaries or statements about that change. Which may or may not be as detailed as could be necessary for those in the financial advising industry. As stated, the rules would require a distribution if contributions to certain IRA’s exceed new amounts. This might sound like a monkey wrench in the financial plan of many of your clients, but the language is specific. As one group of attorneys summarized it, the changes would effect individuals whose “combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million (as adjusted for inflation).”[1] In a recent survey, most Americans think they’ll need between $1.7 and $1.9 million to retire comfortably, a rise in amounts during the pandemic.[2] In other words, this proposed change would apply to those who have five times more in their combined retirement accounts than most Americans think they’ll need for their retirement. Further, the new minimum distribution on these so-called Mega IRAs would only apply to individuals (or those filing separately) earning more than $400,000, heads of households earning more than $425,000, or married couples jointly earning $450,000. Only 10% of Americans made more than $200,000 per year in 2020.[3]

Another aspect of the proposed changes involves so called back-door conversions to Roth IRAs. This proposed change, like the one detailed above, also applies only to the higher income earners listed above (again, less than 10% of all Americans). Additionally, it only applies to distributions, contributions and transfers made after December 2031, meaning, the impact on a client’s current financial plan is limited. The back-door conversions involve rolling over contributions to a traditional IRA (from a 401(k) or 401(k)-like plan), then shortly thereafter rolling the traditional IRA into a Roth IRA.

Finally the proposed amendments would limit contributions to IRAs by those with total accumulated retirement assets worth more than $10 million.

What seems more important than these changes are the reactions to the proposed changes to IRAs and Roth IRAs. The number of articles and opinions written about the changes shows a real concern over changing any of the investment rules. It’s as if some of those writing about investment changes fear a domino-like effect of changes. While none of the advisors, attorneys, or analysts specifically stated that they were concerned about changes to some IRAs portending changes to more investment products or foretelling broader changes (e.g., regulations including a broader range of incomes like $200,000 or lower), there may be a real concern out there. And that may show a real concern among your clients about what might be to come in changes to investment products. It could be helpful to get ahead of that concern by re-assuring your clients that you closely monitor legislative and regulatory changes. Also, that you have the knowledge and experience to assist them in meeting their retirement readiness goals even if there are changes to certain regulations.




These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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