On the Horizon: Forced Retirement Plan Distributions?

Take-Away: There are rumors coming out of Washington D.C. that one of the possible sources of new revenue  as part of the upcoming 2022 budget that Congress is about to debate is a forced lump sum distribution if a retirement account balance exceeds a specific dollar amount.

Rumor: The rumor is that if an IRA or a qualified plan account has a balance in excess of $5.0 million, a forced distribution would be required of the excess amount. The distribution of the excess amount would be taken as a lump sum, not subject to  required minimum distributions. In addition, this forced distribution rule would apply even if the retirement account owner is under the age 72 years.

Example: Todd owns an IRA with a balance of $7.0 million. Todd is age 54. If this forced distribution rule becomes the law, Todd will have to take a lump sum distribution of $2,000,000. If the remaining $5,000,000 continued to be invested, and over the next year Todd’s ‘adjusted’ IRA balance grew to $5,250,000, that next calendar year Todd would again be required to take a lump sum distribution of $250,000 at age 55 years.

Community Property: You will recall that the Tax Code pretty much ignores community property principles when it comes to the taxation of distributions from an IRA when the contributions made to the IRA are marital earnings which are classified under state law as the community property of both spouses. 

Accordingly, even if the large IRA balance is accumulated in a community property jurisdiction, the named owner of the IRA will still have to take the forced distribution of the excess IRA account balance, even though the owner’s spouse has a legal claim under state property law to 50% of the account balance as his or her community property interest.

IRC 408(g) which deals with the taxation of distributions from an IRA provides that such taxation of the IRA owner “ shall be applied without regard to any community property law.”

Conclusion: It can’t be stressed enough that this is only a rumor that may never come to pass. However, if the theme of any new federal tax legislation is to tax the wealthy, a forced distribution of assets from an IRA, or other qualifed plan account, which has a balance above $5.0 million, seems to fall into the realm of possibility.

My guess is that if a Roth IRA had a balance in excess of $5.0 million, its excess balance would also be subject to the forced distribution. While the forced distribution from the Roth IRA would not be immediately taxable, the earnings on that forced distribution amount would be subject to immediate income taxation.

We can expect more rumors coming out of Washington D.C. in the next few days as Congress starts to look at the various bills designed to fund the federal budget for the next fiscal year. It should be an interesting few days.