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:
Will Crypto Investing be Banned QUESTION:
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.