Cap on Large Retirement Balances

Full Title:
A bill to amend the Internal Revenue Code of 1986 to impose limitations on high-income taxpayers with large retirement account balances.

Summary#

This bill would limit how much high-income people with very large retirement account balances can add each year to individual retirement accounts and similar plans. It stops or reduces new contributions once a person’s total retirement balances reach a high threshold and it raises required minimum distributions (RMDs) for those with large balances. The stated policy goal is to restrict further tax-advantaged accumulation in very large retirement accounts.

Key changes:

  • New contribution cap: For taxpayers whose prior-year income is above specific thresholds, annual contributions to IRAs and similar plans are limited so that they cannot increase an individual’s aggregate vested retirement balances above an applicable dollar amount.
  • Dollar amounts: The base cap on aggregate balances is $10,000,000. The income cutoffs that trigger the rule are $225,000, $400,000, $425,000, or $450,000 depending on filing status; these amounts are adjusted for inflation after 2027.
  • RMD increase for large balances: For people whose aggregate vested retirement balances exceed the applicable dollar amount, the bill increases the minimum required distributions from their plans. It also sets special rules about how those increased RMDs are allocated across plans and accounts.
  • Plan and distribution rules: Plans (including 401(k), 403(b), 457 plans, annuity contracts, and IRAs) must let an employee who certifies they are subject to the increased RMDs elect an immediate distribution of the amount they choose. Certain distributions tied to the increased RMDs are treated as required distributions and are not eligible for rollover.
  • Tax and withholding changes: The bill amends the excise tax rule for excess contributions and sets a 37% withholding rate for required distributions that arise under these new rules (with some exceptions for qualified Roth distributions).
  • Effective dates: Contribution limits apply to taxable years beginning after Dec 31, 2026. The RMD increases and plan changes apply to taxable years and plan years beginning after Dec 31, 2033.

What it means for you#

  • High-balance savers (individuals with large retirement accounts):
    • If your prior-year modified adjusted gross income is above the bill’s thresholds and your total retirement balances are at or above the cap, you would not be able to make new regular contributions (or could only contribute up to the difference between the cap and your current balances).
    • If your retirement balances exceed the cap, your required minimum distributions could be larger than under current law. That may increase your taxable income in the year you receive the extra RMD.
    • If you have large Roth balances, some of the additional required distributions allocated to Roth IRAs or Roth accounts are treated as qualified (tax-free) distributions under certain rules.
  • Workers and plan participants:
    • Your employer’s plan must allow you (if you certify you are subject to the new RMD rule) to take an immediate distribution in the amount you choose, including amounts contributed via salary reduction.
    • Distributions that pay the increased RMDs are treated as required distributions and generally cannot be rolled over to other retirement plans.
    • Early-distribution penalties (the 10% additional tax) do not apply to distributions that are required because of the new excess-balance RMD rule.
  • Plan administrators and employers:
    • Plans must add features to permit immediate distributions for affected participants who certify their status.
    • Plans must identify affected participants, compute aggregate vested balances across multiple plan types, and handle new withholding and reporting rules.
  • Taxpayers generally:
    • The changes only affect taxpayers above the income thresholds and with very large retirement balances. Most taxpayers with modest account balances are not affected.

Expenses#

No publicly available information.

Possible fiscal or administrative effects the bill text implies:

  • Plan administrators and employers would likely face additional recordkeeping, valuation, and administrative work to track aggregate balances across plan types and to process elections and distributions.
  • The Treasury may collect additional income tax and excise tax when larger required distributions are paid and when excess contributions are taxed. The bill text includes a new excise-tax rule for excess contributions and higher withholding for required distributions, but it does not include a cost or revenue estimate.
  • There could be compliance costs for individuals and advisers to calculate thresholds, balances, and tax withholding.

Proponents' View#

  • The bill appears intended to limit further tax-advantaged accumulation in very large retirement accounts by wealthy taxpayers.
  • A possible argument for the bill is that it prevents very large balances from continuing to grow tax-free through new contributions, while prompting distribution of large holdings into taxable accounts.
  • Supporters may say this could improve fairness by reducing preferential tax treatment for extremely large personal retirement savings.
  • The bill includes measures (Roth-treatment rules and rollover exceptions) to control how increased distributions are treated, which could be seen as reducing opportunities to preserve tax advantages for already-large Roth balances.

Opponents' View#

  • One concern is administrative complexity. Plans and employers must track aggregate vested balances across many plan types and implement new distribution and withholding processes.
  • The bill does not provide a public fiscal estimate in the text. It is unclear how much revenue or cost would result from higher RMDs, excise taxes, and increased withholding.
  • The timing is staggered (contribution limits start in 2027; RMD changes and plan rules begin in 2034), which could complicate planning and implementation.
  • It is unclear how illiquid or hard-to-value plan assets will be handled in practice. The bill has a special rule excluding certain unmarketable employer securities from the allocation of increased RMDs, but questions could remain about valuation methods for other assets.
  • The rule could create tax-timing exposure for affected individuals who must take larger distributions and thus face higher taxable income in particular years.