Retirement Provisions in Build Back Better Bill Passed by The House – What’s in and What’s Out?
The Build Back Better legislation passed by the House on November 19, 2022, includes several changes from the original bill text. Here’s a quick summary of what made it into the final bill and what is out.
What Was Taken Out of the Final Bill
– Restrictions on IRAs investing into private companies and start-ups. This prior section, known formally as 138312, was removed from the final bill passed by the House. This section would have restricted IRAs from investing into private companies, private funds, and start-ups. Removal of this section is great news for self-directed IRAs as this section would have forced distributions of private company and start-up assets from existing retirement accounts and would have restricted investments in these assets beginning in 2022. Thankfully, Congress heard the outcry of affected IRA savers and realized the negative impact this would have. This restriction was removed from the bill.
– Restrictions in IRA owned LLCs where the IRA owner is the manager. The IRA owned LLC is a common structure used by IRA owners who invest in real estate and other IRA assets. This prior section, known formally as 138314, would have restricted an IRA/LLC where the IRA owners is a manager. This section was removed from the final bill passed by the House. Similar to 138312, Congress heard how this would hurt IRA savers and the real estate and small businesses who receive these IRA investment funds. This restriction was removed from the bill.
What Made it Into the Final Bill
– Back Door Roth IRA and Mega Back Door Roth 401k. The bill includes new restrictions that will prevent non-deductible traditional IRAs dollars (or after-tax employee) from being converted to Roth IRA or Roth 401(k)s. These restrictions apply at all income levels and will entirely close out the back door Roth IRA and the Mega Back Door Roth 401k beginning in 2022. The bill still needs to be passed in the Senate and signed into law by the president, but these restrictions made it into the final bill and close out a common strategy used by many retirement accounts savers to maximize Roth IRA contributions.
– Roth Conversions No Longer Allowed for High Income Earners ($400k single/$450K married). The bill will prohibit all Roth Conversions for high income earners ($400K single/ $450K married) so that only those with taxable income under $400k/$450k will be able to make Roth conversions. The good news is that this provision does not take effect until tax year 2032. Many traditional IRA owners who would like to convert to Roth have wondered whether they should hurry and convert in 2021 but the Roth conversion restrictions will not apply until 2032.
– $10M Cap on Retirement Account Balances. The bill includes a new cap on total retirement account balances for an individual of $10M. Anyone who has balances over $10M will be required to take annual distributions of amounts in excess of $10M to bring the account balance down over time. This is the first time a cap has been passed in a bill by any chamber of Congress. For those with larger accounts, the good news is that this provision does not take effect until 2028.
The bill passed the House with all democrats but one voting in favor and with all republicans voting no. The bill now goes to the Senate where Senate Majority Leader Schumer has said they plan to vote on the bill before Christmas. Many experts predict that the Senate will make changes and will pass a different version, which will then have to go back to the House for approval before being sent to the President.