Senate Ron Wyden's Proposal on Roth IRAs

Senator Wyden (D-Oregon) has been interested in reforming retirement account tax treatment for some time.  Back in the fall of 2014, he and Senator Orrin Hatch held hearings on the need for retirement account reform, focused on the idea that too much of the retirement tax breaks go to people who don’t need them (much like the mortgage interest deduction provides a substantial tax break to wealthier Americans).  See, e.g., Congress Targets Retirement Tax Breaks, Forbes (Sept. 16,  2014).

Consistent with this earlier effort to get Congress to focus retirement tax breaks more appropriately, Senator Wyden today released a draft bill–The Retirement Improvements and Savings Act of 2016–that would perhaps start to make a dent in the excessive tax breaks Congress has provided in the Internal Revenue Code for the wealthy while providing some reasonable changes to support  retirement savings and planning for ordinary taxpayers with shallower pockets. 

The proposal would cap the total value of a Roth IRA or individual retirement account at $5 million and require distributions of any amounts in excess of that ceiling.  Roth conversions from regular IRAs or employer-sponsored plans would no longer be allowed.  The proposal would also cut back on some of the estate planning gimmicks–like so-called “stretch IRAs”–that wealthy people can currently use to avoid even the puny estate tax that decades of slashing taxes for the wealthy have left us with.  (Only estates left by the wealthy few at the very top of the wealth distribution ever pay any estate taxes because of the extraordinary high level of the current estate tax exemption; and when taxes are paid, they are paid at very low rates, due to the effort by the GOP to eliminate this tax that is the only bulwark ensuring that some tax is paid.)  

The bill would provide a credit (up to $500) payable into a retirement account for certain contributions to retirement savings: for joint return filers, the credit would be available for those with incomes  up to $85,000, with the amount of the credit phasing out between $65,000 and $85,0000.  (See proposed section 6433 and amendment to section 25B (a)-(f).)  Some of the provisions proposed are intended to reflect the longer life expectancy retirees now enjoy compared to when the minimum distribution and other requirements were put into place.  The bill would repeal the maximum age for making contributions to traditional IRA accounts, and it would gradually increase the age at which the first minimum distribution must be taken, while also allowing relatively small accounts ($150,000 or less) to continue accruing value in retirement accounts without requiring minimum distributions to be made.

Here is the table of contents for the draft bill:

TITLE I—ENCOURAGEMENT OF RETIREMENT SAVINGS

Sec. 101. Matching payments for elective deferral and IRA contributions by

certain individuals.

Sec. 102. Repeal of maximum age for traditional IRA contributions.

Sec. 103. 60-day rollover to inherited individual retirement plan of nonspouse

beneficiary.

Sec. 104. Treatment of student loan payments as elective deferrals for purposes

of matching contributions.

TITLE II—TREATMENT OF ROTH IRAS; MINIMUM REQUIRED

DISTRIBUTION RULES

Sec. 201. Special rules relating to large Roth IRA account balances.

Sec. 202. Elimination of Roth conversions.

Sec. 203. Application of lifetime required minimum distribution rules to Roth

IRAs.

Sec. 204. Increase in age for required beginning date.

Sec. 205. Exception from required distributions where aggregate retirement

savings do not exceed $150,000.

Sec. 206. Modifications of required distribution rules for retirement plans.

TITLE III—ANTI-ABUSE RULES RELATING TO IRAS

Sec. 301. Valuation of IRA investment assets.

Sec. 302. Statute of limitations with respect to IRA noncompliance.

Sec. 303. Prohibition of investment of IRA assets in entities in which the owner

has a substantial interest.

Sec. 304. IRA owners treated as disqualified persons for purposes of prohibited

transactions rules.