Proposed Budget Reconciliation Amendment- The Build Better Act: Impact on IRA vs Solo 401k

In recent weeks the House Ways and Means Committee approved funding provisions for the Build Back Better Act of 2021 and included provisions that would impact IRAs and qualified plans including solo 401k plans. While the bill has to be approved by both the House and the Senate before it can be sent to the President for signing, following is a comparison of the impact the bill would have on IRAs vs Solo 401k plans.

Impact the Pending Bill Would Have on IRAs

Contribution Limits for High Income Tax Payers:

Effective after 12/31/2021, a high-income taxpayer($400,000 – $450,000) who has a combined value in IRAs and qualified plans (e.g., 401k including solo 401k and 403b) that exceeds $10 million would be prohibited from making annual contributions to an individual retirement plan (i.e., a traditional or Roth IRA) for a taxable year.

Compliance Note: Contributions to SEP, Solo 401k and SIMPLE IRA would still be permitted, meaning the above contribution provisions would solely prohibit IRA & Roth IRA contributions.

Example 1: Julie has a solo 401k balance of $9,995,000 on December 31, 2021. If she wants to make an IRA contribution in 2022, Julie can only contribute $5,000 to her IRA, but she could still contribute to her solo 401k plan.

Example 2: Jack has $12 million in his solo 401k as of December 31, 2021. He would not be able to make an IRA contribution in 2022, but could contribute to his solo 401k.

The 50% RMD applies regardless of the individuals age, so even applies to those younger than 72.

The 10 Million Threshold

Account balances used to determine 10 million threshold include IRAs and defined contribution plans including solo 41k plans, whether as a participant, owner of beneficiary. Other qualified plans such as 403b, and governmental 457b plans are also included.

Just like regular RMDs, the new RMD may not be transferred to another retirement account and the 10% early distribution penalty does not apply. However, the new RMD would be subject to a 35% mandatory federal tax withholding.

What if AGI is Below the $450,000 Threshold QUESTION:

I watched George Blower's YouTube video on the proposed changes that the govt powers that be are kicking around. One question: it looks like high income tax payers would be forced to take 50% distributions above $10M in account balances. But what if your AGI is below that $450k threshold? Would you not have to take a RMD?

Good question. 
The 50% RMD on the combined value of retirement accounts such as 401k plans, IRAs, 403b and 457, for example, exceeding $10 million would not apply for individuals NOT making more than  $400–$450K AGI (as adjusted for cost-of-living increases (COLAs).   
 
A high-income taxpayer is one whose adjusted taxable income for a taxable year exceeds $400,000 for individual filers, $425,000 for a head of household, and $450,000 for married individuals who file a joint return or who are a surviving spouse.

Will Crypto Investing be Banned QUESTION:

Is the use case around alternative assets (in my case crypto) now done? Or should I still proceed prior to the effective date (Jan 1 2022) of the new bill?

While it is still early legislatively and subject to change, the proposed version would not prohibit IRA/Solo 401k investments in cryptocurrency. 

For more FAQs, CLICK HERE

How the Pending Bill Would Impact Solo 401k Plans

Eliminate Mega Backdoor

The mega backdoor solo 401k option would go away by 12/31/2021, resulting in no longer being able to both make voluntary after-tax contributions or to convert voluntary after-tax funds in 2022 and later years.

Eliminate Pretax Conversions for High Income Earners

Starting in 2032, eliminates pretax conversions and rollovers to Roth from non-Roth accounts for those making $400–$450k.

Video Slides: Impact on Solo 401k vs IRAs-Congress Attack on Retirement Plans

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About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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