Congress Targets Large IRAs and Roth Conversions

Congress Targets Large IRAs and Roth Conversions

September 21, 2021
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House Democrats are proposing new rules regarding retirement accounts for the rich, part of a restructuring of the tax code tied to a $3.5 trillion budget

The reforms are aimed to prevent the use of retirement accounts as what some perceive as tax shelters for the wealthy and instead promote them as a way for low- and middle-income Americans to build a nest egg. Most of the changes would start in 2022.

High net worth individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled this month by the House Ways and Means Committee.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year. It would also prevent savers from using the “mega-backdoor Roth” strategy, regardless of income level.

Further, the legislation would prohibit individual retirement accounts from holding investments that require buyers to be accredited investors, a status generally reserved for wealthy investors.

“IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,” Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, said in July after a data release showing growth of “mega” IRAs.

However, there is one overlooked area used in financial planning where Congress very rarely ventures that is permanent Life Insurance with a cash value. Life insurance has always been a tool that the wealthy use to grow their estate and transfer their wealth to the next generation tax-free.

Life insurance can also be used to create a tax-free income stream. An indexed universal life policy for example has a cash value that can be linked to an index strategy that can grow tax deferred. Systematic loans against the cash value can be taken tax-free income.

High net worth individuals should also consider Premium Financing which is a way to use leverage to your advantage when purchasing a large face amount life insurance policy. Also borrowing at a low interest rate in today’s environment to finance premiums can create what is called an arbitrage if the cash value linked to an index strategy performs at a higher rate than the interest on the loan.

The CPA Journal had an article back in 2009 titled “Premium Financing: The Time Is Now” which discusses using Premium Financing for estate planning purposes for high-net worth individuals. The Journal said and I quote “Once the decision to purchase life insurance has been made. Financing premiums saves money.