Congress Targets Large IRAs and Roth Conversions

Congress Targets Large IRAs and Roth Conversions

September 21, 2021

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.