Bottom Line Up Front

• Congress is exploring several tax reform changes for IRA and 401(k) retirement accounts to increase taxes on the wealthy and raise funds for the $3.5 trillion budget for the Build Back Better Reconciliation bill.
• The changes include limiting high-earning individuals from making excessive contributions, new RMD rule for retirement accounts in excess of $10 million, and a limitation on the use of certain investments that could generate excessive returns.
• While these changes will have a great impact on IRA and 401(k) accounts, there is an alternative that the Congress has overlooked, cash balance plans.

As part of the Build Back Better Reconciliation Bill, Congress is reviewing several tax reform changes for retirement accounts to increase taxes on the wealthy to raise the funds for the $3.5 trillion bill. Congressional leadership is still trying to pull the votes they need to push the budget through the Senate, but if you have significant assets and depend on your retirement plan as a means to reduce your annual taxes, now may be the time to start planning ahead.

The part of the bill aimed at increasing taxes for high-income individuals intends to do so by limiting their ability to defer or avoid excessive amounts of taxes via retirement accounts. The bill outlines three areas they plan on target:

• Limiting high-earning individuals from maing excessive contributions if total aggregate IRA and defined contribution account (401k) balances exceed $10 million
• Any retirement accounts with funds over $10 million would be subject to new RMD rules that require a distribution of at least 50% of the excess over $10 million the following year
• Limiting the use of certain investments that may generate extravagent returns

These new rules would only impact taxpayers that meet a minimum income threshold:

• Single filers: $400k
• Head of household: $425k
• Married filing joint: $450k

These provisions only pertain to Individual Retirement Accounts (IRAs) and defined contribution accounts (401k). However, there is an entirely separate category of retirement plans that Congress seems to have overlooked: cash balance plans.

Cash Balance Plan Basics

Cash balance plans (CB Plans) are tax-advantaged and creditor-protected retirement plans to help high-earning employers build substantial assets in a short period of time. A well-designed plan has the potential to allow you to save $200,000 to $300,000 per year, depending on a number of factors.

Being a defined benefit plan, these accounts are subject to minimum participation rules and nondiscrimination testing. Business owners, partners, or key employees can receive significant tax advantages through these plans and increase their retirement savings. A cash balance plan is best suited for businesses with very few and relatively older owners, partners, and employees – as well as a higher ratio of owners and partners to employees.

Congress stopped short of considering cash balance plans when devising their plan to raise funds to cover the BBB reconciliation budget. These plans are lean, mean, tax-savings machines, and when implemented by the end of the year, you can save thousands before tax time. It will prepare you to mitigate the repercussions to come if the reconciliation bill is passed.

Here are a few things you should consider before talking to your financial advisor:

• CB plans are not like profit sharing plans in that the amount you contribute is not discretionary. You’ll have to create an annual funding obligation for the plan in order to avoid excise tax penalties.
• The plan will need to be tested annually to ensure that the plan is meeting minimum participation rules and passiong non-discrimination testing.

Outlook

As of the date of this article, negotiations for the bill are still in the works and it may be a few months until it’s finalized, voted on, and, if passed, signed into law. Any of these rules could be changed or removed. The bill may not even come to fruition. In any case, it is important to always be prepared and consult with your tax and financial advisors. This will help you stay compliant and up-to-date with any new rules and regulations.

At Odyssey Advisors, we are always available to help so feel free to reach out to one of our consultants if you have any questions.