How “American Families Plan” Tax Proposal Can Impact Your Retirement

After months of anticipation, the Democrats’ tax plan has arrived. The proposed legislation, the “American Families Plan,” is very different than what was expected. Among other measures, the new law would increase the top ordinary income tax bracket from 37% to 39.6% and impose an additional 3% ‘surtax’ on income above $5M, and a cap that will force IRAs with more than $10M of value to distribute 50% of any excess above that amount. In addition, long-term capital gains rates would rise to 25% and step-up in basis will remain. Moreover, the legislation proposes several new crackdowns, including new restrictions on “backdoor” and “Mega backdoor Roth IRAs and Roth Conversions. as well as this bill also prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth IRAs regardless of income level. This prohibition is effective for distributions, transfers, and contributions made after December 31, 2021.

While there are certainly some surprises buried in the 881-page draft bill, the overall trajectory of the potential legislation is clear: if enacted, taxes are going up in a myriad of ways for corporations and wealthier taxpayers.

Soon, the Senate Democrats will produce their own separate draft bill of the American Families Plan that will undoubtedly have material differences with the House’s version, all of which must be reconciled before a final bill lands on the president’s desk for signature. Although many of the provisions in the House’s draft bill are likely to make it into the final bill, some proposals are bound to be scrapped or significantly modified. The draft bill, which has been largely pre-cleared with the House Democrats, is a next step—not a final step—in the legislative process.

During this episode listen to Mike and Rich go over and discuss the proposed changes and what it could mean to you if you are close to retirement or retiring.