Compliance March 15, 2024

President Biden Budget Proposes Imposing RMDs on Large Retirement Accounts

The proposal would apply to Roth sources in excess of $10 million for individuals earning $400,000 or more.

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President Joe Biden’s budget proposal for fiscal year 2025 reveals some of his administration’s goals for tax changes to retirement savings. The budget, released Monday, includes a proposal eliminating backdoor Roth conversions and requiring distributions from retirement accounts the balances in which exceed $10 million for high-income filers.

Backdoor Roth

The administration proposes to prevent those making more than $400,000, or $450,000 for married couples, from making so-called backdoor conversions into Roth IRAs.

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A backdoor Roth conversion is a process that permits individuals that make more than $161,000 or couples making more than $240,000, and are therefore not allowed to contribute directly to a Roth IRA, to contribute indirectly. Instead, a participant contributes to a qualified plan or to a traditional IRA, typically on an after-tax basis, and simply rolls the money into a Roth IRA. Some sponsors offer this as in-plan service.

Since the growth in a Roth source is not taxable income upon withdrawal, and Roth IRAs are not subject to required minimum distribution rules until the owner dies, the investment vehicles can allow for large accumulations of untaxed wealth.

The Treasury Department earlier this week published a document titled the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals which describes the revenue-raising items in the president’s budget. This annual explanation of budget proposals, known as the Treasury green book, noted that “In recent years, it has become clear that some taxpayers have been able to accumulate amounts in tax-favored retirement arrangements that are far in excess of the amount needed for retirement security.”

Biden’s proposed budget describes backdoor Roth conversions as a practice that “inappropriately sidesteps the income restrictions on contributions to Roth IRAs.”

Mandatory Distributions for Large Accounts

Additionally, the budget proposes requiring high-income savers with an aggregate balance of $10 million or more in tax-preferred retirement accounts to withdrawal half the difference between $10 million and their account balance annually. For example, an account totaling $11 million would have to withdraw $500,000. An account with a balance in excess of $20 million would have to withdraw the funds until they are at or below $20 million.

This proposal applies to employer-sponsored accounts as well as IRAs, and to traditional and Roth sources if the aggregate balance is over $10 million. However, if the balance is over $20 million, then withdrawals must come out of any Roth source first.

The Treasury considers the mandatory withdrawals a revenue raiser because they would be considered RMDs. This means if an IRA owner fails to withdraw appropriately, they would be subject to a 25% excise tax, or 10% if it is corrected, of the amount they were supposed to withdraw. The proposal does not mention any other tax benefits related to increased consumer spending tied to these withdrawals.

The provision would also only apply to those earning $400,000 or more or couples earning $450,000 or more. The mandatory withdrawals may not come out of assets related to an employee stock ownership plan, since those assets are more difficult to value.

Mark Iwry, a non-resident senior fellow at the Brookings Institution and former senior adviser to the Secretary of the Treasury, says that the main thrust of the proposal is to limit the preferential tax treatment for retirement plans with huge balances that are seen as exceeding reasonable retirement security needs.

Iwry also points out that the proposal applies to those younger than age 591/2 but they would be exempt from the 10% early-withdrawal penalty.

This proposal is “along similar lines to proposals that have been made in the past,” Iwry noted. 

Senator Ron Wyden, D-Oregon, in particular has been an advocate of requiring withdrawals from retirement accounts with very large balances. In fact, Wyden “wanted it to be in SECURE 2.0, but it didn’t get in because it was controversial and did not gain bipartisan support.”

Compliance March 14, 2024

SEC Sued by Red States, Environmental Group, After Finalizing Climate Disclosure

Three separate lawsuits have been filed against the SEC seeking to overturn its final rule. 

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The Securities and Exchange Commission is facing three lawsuits challenging its climate risk disclosure rule, finalized on March 6, from two sides of the aisle on economic matters.

The climate risk disclosure rule requires public companies to disclose their material climate risks related to physical and transitional risks, costs related to severe weather events and any strategy they may have to reduce climate risks. Larger companies must also disclose greenhouse gas emissions from their operations and power consumption, known as Scope 1 and Scope 2 emissions, respectively. 

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The lawsuits come from both sides of the political aisle. Two complaints come from 19 state attorneys general, each from Republican-led states. The first lawsuit was filed on the day the rule was approved with the 11th U.S. Circuit Court of Appeals—which hears cases from Alabama, Florida and Georgia—by 10 states: Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Virginia, West Virginia and Wyoming. 

The second complaint was filed on Tuesday in the 8th U.S. Circuit Court of Appeals—which hears cases from Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota—by nine more Republican-leaning states: Arkansas, Iowa, Idaho, Missouri, Montana, Nebraska, North Dakota, South Dakota and Utah. 

Both complaints argue that the “final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law,” but have not elaborated further. 

The Sierra Club, a grassroots environmental advocacy group, also sued the SEC in the U.S. Circuit Court of Appeals for the District of Columbia on Wednesday.  

Though that complaint does not spell out its objection, a press release from the Sierra Club argues that the “final rule will yield much less information about companies’ exposure to climate-based risks than the proposed rule would have.”

The organization also wrote that, “[b]y allowing companies to selectively report their emissions, the SEC has fallen short of its statutory mandate to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation.” 

The SEC commissioners voted 3 to 2 vote in favor of the rule. SEC Chairman Gary Gensler, a proponent, has said the rule will help investors compare companies more easily by having more uniform climate disclosures. 

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