Bill proposed to crack down on backdoor roth (and other loopholes)
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Anonymous
That would fundamentally change the Roth IRA account. They appear to be making these excess funds required minimum distributions which would be at whatever tax rate applied for that type of distribution(I.e. no taxes for Roth IRA distribution) |
Anonymous
Agree. As I read it, the Roth IRA could no longer be allowed to grow into perpetuity once it reached the $10M threshold. At that point, RMDs would need to be taken by whomever holds the account. My guess is that the law would require RMDs at the latter of $10M account balance or reaching 59.5 years of age. If you forced RMDs before 59.5 years of age, there would be a 10% penalty. Or perhaps they will waive the penalty? It's not clear to me. |
Anonymous
I think they'd have to waive the penalty too. I'm all for capping IRAs (especially Roths) but forcing somebody who followed the law into a situation where they pay a noncompliance penalty seems like one step too far and as a PP mentioned, could present thorny Constitutional issues around retroactive taxation that I've always seem Congress try to avoid. Get the money out of the IRAs into traditional accounts where it will start to be taxed going forward. |
Anonymous
The thresholds being proposed are >$10M combined total of traditional and Roth IRA and defined contribution plans (e.g. 401k). Distribution requirement would be 50% of anything over $10M and 100% of anything over $20M and must come from the Roth accounts first. This only applies to high income earners. |
Anonymous
Were you able to track down whether/where the 10% early withdrawal penalty on Roths is waived? I’m not used to reading such convoluted legislation. |
Anonymous
DP. I would expect the 10% penalty to be waived (since its is forced), but you may have to pay taxes on the gains. I did not read this in the bill because I can't make sense of that without spending a lot of time doing so... but a summary news article stated taxation was unclear. It is sort of fundamentally changing the Roth IRA, yes, but in order to have amassed >$10M (or.... > $1B) prior to the age of 59.5, a taxpayer has likely already fundamentally gone around what the Roth was meant to be. Yes it followed the law. I agree it is complicated. It will be interesting to see how this develops. I very much hope the close the loophole going forward at minimum. I don't feel particularly bad for anyone who has to paid some taxes on a balance > $10M, but I definitely see the argument against that.... |
Anonymous
Yes, there is an exemption from the 10% penalty. |
Anonymous
In full disclosure I have a vested interest in this because I have >$10m in a Roth but am under 59. I interned at Apple and fell in love with the company and built up a Roth with AAPL stock in the early 2000s. I've held most of it to this day. I'm sure I am part of a small (very lucky) group, but I thought I was playing by the rules. If I had bought these shares outside of the Roth, I could just leave them as is. But because they are inside the Roth, I'll be forced to sell some and not even at short-term capital gains prices? I'm not going to be hurting either way but at some point it seems fundamentally unfair and would shake one's belief in any promise made by the Government in the future. |
Anonymous
You could just keep HHI < $400/450k? Is that possible?? I get what you are saying (and I have my tiny violin ready). Congrats on your success with AAPL! |
Anonymous
Yes, my HHI is under that already but then I live my life actively avoiding any bonuses or increase in salary I suppose? Just seems a little nutty that Warren Buffett and Mitt Romney would cash out tax free while somebody in their 40s or 50s would pay a 50% tax rate. They must really hate Peter Thiel to propose such an erratic law targeted at such a tiny group of tax payers. I hope they recognize there may be other folks caught in the crossfire. |
Anonymous
*other extraordinarily wealthy folks, yes. Not billionaire wealthy, but very high wealth and income. Agree it is odd buffet and romeny could cash out without taxes tho |
Anonymous
They do hate him, there’s a special provision now preventing investments in companies you have a 10% ownership interest in if it’s a non tradeable security (I.e. private entity or preIPO) |
Anonymous
Newsflash - you are not caught in the crossfire, you are part of a group of taxpayers who are targeted. This is a feature, not a bug. As for "it seems fundamentally unfair and would shake one's belief in any promise made by the Government in the future," don't be ridiculous. Tax laws change all the time, sometimes they benefit you, sometimes they don't. But that fact that they change is not, in and of itself, unfair. Does it sting? Sure. Unfair? Of course not. At least this one is targeted at people who can afford it. |
Anonymous
| This reminds me of people upset about the SECURE act ending the "stretch IRA" method of passing down inheritance. I just had a very hard time mustering any sympathy... |
Anonymous
Many people planned and made decisions based on the protections that these accounts offered. If we capped IRAs at $500k and taxed all distributions above that amount, I bet we'd see protests in the streets of DC. By your definition, that would not be unfair. It seems pretty unfair to me. I see no reason why the cap couldn't be lowered to capture anyone at almost any level; when you look at the median income and net worth in this country, almost anyone who chose to save for 20-30 years rather than spend looks like a fat cat. I understand PP's frustration with the AAPL stock because early withdrawals from IRAs are taxed at short-term capital gains rates, so the people who tried to prudently plan, aren't just losing the IRA but are paying an extra double-digit % penalty by paying short-term capital gains tax on what would normally be capital gains. It's also pretty obviously targeted just at Peter Thiel. Nobody cared when Mitt Romney's $100m IRA was disclosed. Something about Peter Thiel really pissed off the dems. He has a few billion dollars to fight back with so it will be interesting to watch. |