S. 5040: To amend the Internal Revenue Code of 1986 to impose limitations on high-income taxpayers with large retirement account balances.

This bill would change tax rules for very large retirement accounts held by higher-income taxpayers.

What it would do

• Limit new contributions to retirement accounts for certain high-income people who already have large balances across their retirement plans.
• Create a new threshold: if a taxpayer’s retirement balances are above $10 million, they could be restricted from making further tax-favored contributions, depending on how much they already have saved and their income.
• Apply the limit only to higher-income taxpayers. The income thresholds are generally:
  • $400,000 for most individuals,
  • $425,000 for heads of household,
  • $450,000 for married couples filing jointly or surviving spouses, and
  • $225,000 for married individuals filing separately.
• Treat some types of contributions differently:
  • Rollovers from one retirement account to another would not count as new annual contributions.
  • Contributions to SEP and SIMPLE plans would be handled differently for purposes of the limit.
  • Transfers or accounts received because of death, divorce, or separation would not count as annual contributions under the new rule.
• Add an excise tax structure for excess contributions that go beyond the new limit.
• Increase required withdrawals for affected high-balance taxpayers beginning later, so they would have to take out more money from retirement accounts once their balances are above the threshold.
• Give taxpayers the right to take distributions from certain retirement plans so they can satisfy the new required-withdrawal rules.
• Change withholding rules so some of these forced distributions would have a higher default withholding rate of 37%, unless the distribution is from a qualified Roth account.
• Allow certain early distributions without the usual 10% penalty if the distribution is required under the bill’s new rules.

When it would take effect

• The contribution-limit and related excise-tax changes would apply to taxable years beginning after December 31, 2026.
• The required-distribution changes would apply later, to taxable years and plan years beginning after December 31, 2033.

Relevant Companies

None found