Biden’s Budget Would Compel Distributions From Retirement Accounts Over $10M

President Joe Biden’s budget proposal for fiscal year 2025 reveals some of his administration’s goals for tax changes to retirement savings. The budget, released Monday, includes a proposal eliminating backdoor Roth conversions and requiring distributions from retirement accounts the balances in which exceed $10 million for high-income filers.

Backdoor Roth

The administration proposes to prevent those making more than $400,000, or $450,000 for married couples, from making so-called backdoor conversions into Roth IRAs.

A backdoor Roth conversion is a process that permits individuals that make more than $161,000 or couples making more than $240,000, and are therefore not allowed to contribute directly to a Roth IRA, to contribute indirectly. Instead, a participant contributes to a qualified plan or to a traditional IRA, typically on an after-tax basis, and simply rolls the money into a Roth IRA. Some sponsors offer this as in-plan service.

Since the growth in a Roth source is not taxable income upon withdrawal, and Roth IRAs are not subject to required minimum distribution rules until the owner dies, the investment vehicles can allow for large accumulations of untaxed wealth.

The Treasury Department earlier this week published a document titled the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals which describes the revenue-raising items in the president’s budget. This annual explanation of budget proposals, known as the Treasury green book, noted that “In recent years, it has become clear that some taxpayers have been able to accumulate amounts in tax-favored retirement arrangements that are far in excess of the amount needed for retirement security.”

Biden’s proposed budget describes backdoor Roth conversions as a practice that “inappropriately sidesteps the income restrictions on contributions to Roth IRAs.”

Mandatory Distributions for Large Accounts

Additionally, the budget proposes requiring high-income savers with an aggregate balance of $10 million or more in tax-preferred retirement accounts to withdrawal half the difference between $10 million and their account balance annually. For example, an account totaling $11 million would have to withdraw $500,000. An account with a balance in excess of $20 million would have to withdraw the funds until they are at or below $20 million.

This proposal applies to employer-sponsored accounts as well as IRAs, and to traditional and Roth sources if the aggregate balance is over $10 million. However, if the balance is over $20 million, then withdrawals must come out of any Roth source first.

The Treasury considers the mandatory withdrawals a revenue raiser because they would be considered RMDs. This means if an IRA owner fails to withdraw appropriately, they would be subject to a 25% excise tax, or 10% if it is corrected, of the amount they were supposed to withdraw. The proposal does not mention any other tax benefits related to increased consumer spending tied to these withdrawals.

The provision would also only apply to those earning $400,000 or more or couples earning $450,000 or more. The mandatory withdrawals may not come out of assets related to an employee stock ownership plan, since those assets are more difficult to value.

Mark Iwry, a non-resident senior fellow at the Brookings Institution and former senior adviser to the Secretary of the Treasury, says that the main thrust of the proposal is to limit the preferential tax treatment for retirement plans with huge balances that are seen as exceeding reasonable retirement security needs.

Iwry also points out that the proposal applies to those younger than age 591/2 but they would be exempt from the 10% early-withdrawal penalty.

This proposal is “along similar lines to proposals that have been made in the past,” Iwry noted. 

Senator Ron Wyden, D-Oregon, in particular has been an advocate of requiring withdrawals from retirement accounts with very large balances. In fact, Wyden “wanted it to be in SECURE 2.0, but it didn’t get in because it was controversial and did not gain bipartisan support.”