Advisors with wealthy clients holding eight-figure retirement accounts may need to revisit strategies under a Democratic proposal to close what lawmakers call a loophole allowing those accounts to continue growing tax-advantaged.
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The legislation was introduced on July 22 in the Senate by Senate Finance Committee Ranking Member Ron Wyden, a Democrat from Oregon, and in the House by House Ways and Means Committee Ranking Member Richard E. Neal, a Democrat from Massachusetts.
“Tax-preferred retirement accounts are not supposed to be a loophole for the ultra-rich to shelter immense fortunes, they’re a lifeline for working Americans who may not otherwise have a dignified retirement,” Wyden said in a statement. “It’s especially outrageous to see these mega-retirement accounts building up at a time when half of American workers don’t have access to a workplace retirement plan at all.”
Neal said in a statement, “Allowing a handful of individuals to accumulate staggering fortunes while still receiving taxpayer subsidies was never what Congress intended.”
Proposal would impose limits on mega-retirement accounts
The bill would require individuals with more than $10 million in their retirement accounts to take distributions. More than 32,000 people had tax-advantaged retirement accounts with more than $10 million each at the end of 2024, according to the Joint Committee on Taxation.
The proposed bill would also ban further contributions to a traditional IRA or Roth IRA if the account holder’s combined balance between IRAs and defined contribution retirement plans, such as 401(k) plans or 403(b) plans, exceeded $10 million for the prior year.
The required distributions and contribution limit would apply to single taxpayers with more than $400,000 in modified adjusted gross income for the prior year and married taxpayers filing jointly with more than $450,000 in modified adjusted gross income for the prior year.
If total balances generally are more than $10 million, then the minimum distribution would be 50% of the amount by which the total account balances exceeded $10 million. If total balances are more than $20 million, the minimum distribution would be the smaller amount of these two:
the amount that would make the total balance in all accounts $20 million, orthe aggregate balance in Roth IRAs and Roth-designated accounts within defined contribution plans.
In both situations, individuals would first have to distribute from their Roth IRAs and next from their Roth-designated accounts within defined contribution plans.
The 6% excise tax on excess contributions under current law would be expanded under the bill to include the contributions limited by the bill.
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Impact on retirement planning
Another approach, better than requiring distributions, for preventing large retirement balances would be limiting contributions, said David W. Demming, founder and president of the Aurora, Ohio-based registered investment advisory firm Demming Financial Services. He has some clients with $10 million to $15 million and said investors could have large balances in their retirement accounts if their stocks grew exponentially or from using options.
“I don’t certainly support somebody, the obscenely wealthy, that have cheated,” he said in an interview. “I respect following the rules, playing by the rules. And if you win, is that a bad deal? … You want to encourage that behavior of investing prudently, showing discipline and using something called time value of money.”
The proposal could affect estate and charitable planning, Demming said. Some clients may intend to leave large IRA balances to charity, raising questions about whether Congress wants to limit that.
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Demming recommends using Roth IRAs, which enable tax-free distributions in retirement, instead of traditional IRAs, which have taxable distributions, because he believes tax rates will increase in the future.
“One of the great lies in America is when you retire … your tax bracket will be lower,” he said. “The tax bill might be lower, but what they’ve been doing is adding all kinds of hidden taxes that they don’t call taxes.”
