Claiming that the tax code needs “a dose of fairness” when it comes to its treatment of retirement savings, Sen. Ron Wyden, D-Oregon, issued a discussion draft of legislation that would cap contributions to so-called “mega” IRAs and make it easier for younger workers struggling with student debt to receive contributions to 401(k)s from employers.

“Tax incentives for retirement savings are designed to help people build a nest egg, not a golden egg,” said Wyden in a statement announcing the proposals under the Retirement Improvements and Savings Enhancements, or RISE, Act.

Those incentives will amount to more than $1 trillion over the next five years, according to Wyden.

A small cohort of savers is significantly benefiting from the tax-deferred treatment of savings in IRAs. According to a report issued by the Government Accountability Office in 2014, of the 43 million people with IRA accounts in 2011, about 8,000 had balances between $5 million and $10 million, about 800 had accounts valued between $10 million and $25 million, and several hundred had accounts with more than $25 million.

Mega accounts were brought to the country’s attention during the 2012 presidential race, when Mitt Romney, then the Republican nominee, disclosed tax statements showing that he had an IRA with more than $100 million in assets.

For the most part, accounts valued at more than $5 million tend to be owned by joint tax filers with gross income greater than $200,000 a year, who are older than 65, the GAO says.

But some have accumulated high account values by investing in assets unavailable to most savers, which are initially valued very low and enjoy disproportionately high returns, the GAO said, citing the example of company owners that invest nonpublicly held shares of their company and ultimately realize massive gains. If invested in a Roth IRA, distributions from those gains are not taxed.

A summary of Wyden’s draft proposal puts the market value of high-value Roth IRAs between $8 billion and $13 billion, and noted press reports of executives in the tech sector with balances between $30 million and $90 million. The Employee Benefits Research Institute said the median IRA account balance in 2013 was about $25,000.

Wyden’s draft would address that issue by prohibiting further after-tax contributions to Roth IRAs once their value exceeds the greater of $5 million or the value of the account as of Dec. 31, 2016, and would require distributions once the cap is exceeded.

The proposal would also eliminate Roth IRA conversions, would require minimum distributions to Roth IRAs, and increase the required minimum distribution age from the current 70 ½ age on traditional IRAs to 71 in 2018, 72 in 2023, and 73 in 2028, to adjust for increases in life expectancy.

All retirement accounts with less than $150,000 in assets would not be subject to required minimum distributions under Wyden’s proposal.

A match from Uncle Sam

Under current law, workers get an incentive to contribute to tax-deferred retirement accounts via the Saver’s Credit. Wyden wants to increase existing income levels to make more people qualify for the credit.

Then, he wants to require those tax credits to be directly contributed to a qualified retirement plan.

As an example, a participant who contributes $1,000 to her 401(k) plan would receive a $500 matching “government contribution,” sent directly to the account, according to a summary of the proposal.

A bump for young participants with student debt

The discussion draft would allow employers to make matching contributions to 401(k) plans on behalf of participants who can’t contribute because of student debt obligations.

In effect, sponsors would be able to treat a student loan payment as if it were a 401(k) contribution, allowing employers to provide a match. As an example, an employee making $5,000 a month who makes loan repayments of $500 a month could receive a match based on the percentage of their salary. A $200 401(k) contribution by the employer would equal a 4 percent match had the participant deferred $500 to her 401(k) instead of making the loan repayment.

The discussion draft also includes new measures to address potential abuse of IRAs and would update prohibited transaction provisions. It would also eliminate the age cap for making contributions to traditional IRAs, which is currently 70 ½.

Instant Insights /

Sen. Wyden proposes capping contributions to 'mega' IRAs

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