By Mark J. Warshawsky

Six weeks ago, I wrote an op-ed critical of then circulating ideas to limit individual retirement accounts (IRAs) over $5 million. The proposal was in response to the supposed scandal of a $5 billion Roth IRA owned by a conservative activist billionaire originally invested in newly issued stock. The proposal was also to be part of funding efforts for the $3.5 trillion “human infrastructure” social welfare programs legislation. I made four main points: (1) The proposal was unfair at the $5 million level and for those without defined-benefit plans because defined-benefit pensions of highly paid, long-serving government workers could easily be worth $10 million and were not being discussed for limitation; (2) the proposal would crimp the investment strategy of many IRA holders with accounts below $5 million, harming them, overall market performance, and, more broadly, middle-income account holders; (3) because of the appropriate fluidity of the retirement system, IRAs and 401k plans need to be considered together; and (4) any abuses of the system can be handled though more targeted legislated changes. I should have further added that it was unfair to change the rules of the game so suddenly for past legal activities without long transition periods.

Now the Democrats of the House
Ways and Means Committee have introduced their detailed proposal to be
effective in 2022. In certain respects, it recognizes some of the criticisms I
gave. But in others, it introduces bad policies. Overall, only a couple of the
provisions should be kept and even they will need fixing.

In particular, Ways and Means has
proposed that contributions to a Roth or traditional IRA are not allowed for
high-income taxpayers (generally those households with more than $450,000 in
income) if the total value of IRAs and defined contribution accounts exceeds
$10 million. Moreover, if total retirement account assets exceed $10 million,
half of the excess will have to be distributed in the following year, and if
the total is $20 million or more, all of that excess will have to distributed in
the following year from the Roth accounts. The proposal also eliminates Roth
conversions from traditional IRAs and defined-contribution accounts for
high-income households from 2032 forward, and from after-tax contributions,
regardless of income level, beginning in 2022.

The proposal prohibits an IRA from
holding any security if the issuer requires the IRA holder to have a minimum
level of assets, income, education, or credentials, with only a two-year
transition period; this provision is not limited to high-income households. It
also prohibits IRA investments in businesses where the IRA holder has a 10
percent interest in the business or more, not tradeable on markets, or any
interest if the holder is an officer, again with only a two-year transition
period. In addition, the statute of limitations is extended from three to six
years for valuation issues examined by the IRS.

The prohibition on conversions to
Roth accounts makes good policy sense as they have been promoted by Congress in
the past as a revenue-raising budget trick and their presence in the retirement
system allows for tax arbitrages and other gamesmanship by individuals. There
is no reason beyond budget tricks, however, to limit this prohibition to only high-income
individuals or to only start in 2032.

It is also reasonable to limit
contributions to IRAs when total retirement account assets are very large,
regardless of income levels. While $10 million in total retirement assets is a
better marker than the $5 million in IRA assets originally discussed, the
marker should be raised to $15 million in total retirement value to be fair;
many people have defined-benefit plans worth $10 million or more and also have
significant IRAs and defined contribution accounts.

Further, it is unfair and
disruptive to market performance to suddenly require rapid distributions for
accounts accumulated legally under old rules or even for new accounts which
simply have the good fortune of rapid investment returns. Traditional accounts
will eventually become subject to minimum distribution requirements. If it is
necessary to impose distribution requirements on new large Roth accounts or
contributions, the distributions should be allowed over 10 years.

Finally, there is no policy sense
to prohibiting IRA investments in assets limited to certain income or asset
levels; this prohibition interferes with investor autonomy and impedes
efficient markets. The other proposed investment restrictions and statute of
limitation rules should only apply to new investments.

In summary, while there are some reasonable changes to IRA rules, the House Ways and Means proposal goes too far in most areas.

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