The Biden Administration recently released its budget proposals for 2024. Of the fourteen proposals listed, two could impact Trust and Estate practitioners, if signed into law. This article will focus on the first such proposal which relates to distributions from an Individual Retirement Account (“IRA”). The Internal Revenue Code (“Code”) allows taxpayers under the age of 50 to contribute up to $6,500 to their IRAs in 2023. Taxpayers over the age of 50 may contribute an additional $1,000. The numbers adjust for inflation each year. If the taxpayer contributes excess funds to their IRA and does not withdraw the excess amount along with any income attributable thereto prior to the tax filing deadline, then such taxpayer would be subject to an annual excise tax. If the taxpayer contributes to a traditional IRA, then the taxpayer may contribute pre-tax dollars and would include distributions from the IRA in income when received. Taxpayers contributing to Roth IRAs do not report the distributions as income because contributions consist of post-tax dollars.
Under current law, distributions from traditional IRAs begin April 1 in the year after the taxpayer has attained age 73. At that time, the taxpayer needs to withdraw a Required Minimum Distribution (“RMD”) amount annually. Taxpayers and their advisors calculate RMDs based upon tables promulgated by the Internal Revenue Service that use life expectancy to determine the distribution factor. That factor is applied to the account balance as of December 31 of the prior year to produce the RMD for that year. When the taxpayer takes their RMD or otherwise withdraws funds from their IRA, they include those amounts in their income. For that reason, many taxpayers wait until they have reached age 73 to begin withdrawing funds from their IRAs thereby deferring income as long as possible and allowing the funds in the IRA to grow without generating income tax. Taxpayers with Roth IRAs may begin withdrawing penalty-free once they have attained age 59 ½ and have held the account for at least five years but Roth IRAs have no RMDs.
These rules do not consider the value of the IRA and depend solely upon the age of the participant as the trigger for distributions. One aspect of President Biden’s revenue proposals aims to change that. The proposal titled “Modify Rules Relating to Retirement Plans” will require any high-income taxpayer with an aggregate vested account balance under tax-favored retirement arrangements that exceeds $10 million as of the last day of the preceding calendar year to distribute a minimum of 50% of the excess amount. If the aggregate value exceeds $20 million, then the taxpayer needs to withdraw the lesser of the excess amount or the portion of the taxpayer’s aggregate vested account balance that is held in Roth IRA or designated Roth account. Thus, if a taxpayer had $15 million in their tax-favored accounts, then this proposal would require distribution of $2.5 million in addition to any RMD otherwise required.
Tax-favored arrangements include defined contribution plans, annuity contracts under Code Section 403(b), eligible deferred compensation plans under Code Section 457(b) maintained by a state, political subdivision thereof, or an agency or instrumentality of a state or political subdivision thereof, and IRAs. The proposal defines high income as modified adjusted gross income of $450,000 for married filing jointly, $425,000 for head of household, and $400,000 in all other cases, all adjusted for inflation. The taxpayer may choose which tax-favored retirement arrangement from which to withdraw the funds; however, if the taxpayer has funds in a Roth vehicle, those funds need to be distributed first. Distributions resulting from this proposal are in addition to amounts withdrawn as RMDs for any particular year but applies even if the taxpayer is not otherwise required to be taking RMDs. Failure to take this distribution subjects the taxpayer to the 25% excise tax on the portion not taken. Thankfully, the penalty on early distributions does not apply to these excess amounts. The taxpayers cannot use the funds for a rollover. The proposal requires plan administrators to report the vested account balance for all tax-favored retirement arrangements for high income taxpayers that exceeds $2.5 million, as adjusted for inflation. This proposal is for tax years beginning after December 31, 2023.
As mentioned above, the Biden Administration released another revenue proposal of interest to Estate Planning attorneys called “Improve Tax Administration for Trust and Decedents’ Estates.” Here’s a link to the document containing all 14 proposals in its entirety: General-Explanations-FY2024.pdf. While it’s interesting to review these proposals, it’s important to remember that they are just that: proposals and have not yet become the law. It appears unlikely that Congress would enact these proposals given the current Republican majority in the House of Representatives. Of course, even if you aren’t concerned with application of these revenue proposals, it’s always a good time to talk with a qualified Trust and Estate practitioner about your Estate Plan.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
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