On March 9, 2023, President Biden delivered a budget proposal that includes a robust spending agenda, higher taxes on the wealthy and plans to reduce the deficit. It also included some interesting provisions impacting Self-Directed IRAs that we have previously seen in the Build Back Better (BBB) bill from the fall of 2021.  The great news is that the budget does not include any provision that impacts a retirement account’s ability to invest in alternative assets.

With Republicans in control of the House, there’s pretty much zero chance that the President’s 2024 budget plan will become law as it stands. However, what the proposed budget will do is put in place a financial and policy map that will serve as political themes for his potential reelection campaign.

Key Tax Provisions in the Proposed Budget

Even though there is little chance that the President’s 2024  proposed budget will become law in its current form, it is helpful to review the key tax points to get greater clarity on what could be expected if Biden and the Democrats gain control of all three branches of government again.

Below is a breakdown of the key tax provisions that could impact American taxpayers.

Business taxation

• Increase the corporate income tax rate from 21% to 28%

Individual taxation

• Impose a 20% minimum tax on individuals who have more than $100 million in assets
• Treat death as a realization event

Cryptocurrency taxation

• Apply the mark-to-market rules to digital asset dealers and traders
• Require information reporting for digital asset transactions

Taxation of investments in real property

• Restrict deferral of gain for like-kind exchanges under section 1031

Partnership taxation

• Tax carried interests as ordinary income
• Prevent basis shifting by related partnerships

Place a minimum tax on billionaires

The budget includes a 25% minimum tax on all the income of the wealthiest .01% of Americans, including their appreciated assets. It would hit those with a net worth of more than $100 million.

Repealing Trump’s tax cuts for the wealthy

Biden’s budget would scrap some tax cuts for certain individuals that were put in place by the Republican’s 2017 tax law. The plan would raise the top tax rate to 39.6% from 37%. This would impact single filers making more than $400,000 a year and married couples making more than $450,000 per year, according to the administration.

Capital Gains

The budget proposes taxing capital gains at the same rate as wage income for those earning more than $1 million, as well as closing the carried interest loophole that allows investment managers to treat much of their compensation as capital gains – thus lowering their tax rate.

Retirement-Related Provisions in Proposed Budget

The budget is clearly more focused on various tax themes involving corporations and high net worth individuals.  However, it does contain a few retirement-related provisions that we have seen before in he BBB bill.  To be clear, there is essentially a zero percent chance these provisions will pass since the Republicans that control Congress are not in favor of it.

Nevertheless, below is a summary of the key retirement related provisions in the Biden 2024 proposed budget.

$10 million cap on IRA and defined contribution plan accumulations

This looks to be generally the same as the $10 million cap on IRA and defined contribution plan accumulations from the most recent BBB bill.  It appears that this provision would apply to both pretax and Roth retirement accounts

Eliminating all Roth conversions for high-income taxpayers

High income taxpayers would be prohibited from doing Roth conversions. High-income taxpayers are taxpayers with modified adjusted gross income in excess of $450,000 (joint filers), $425,000 (heads of household), or $400,000 (other taxpayers) (all figures indexed). 

Eliminating backdoor Roth contributions

Under current law, “Backdoor Roth” contributions are permitted under both plans and IRAs. Just like the BBB bill, the 2024 Biden budget would prohibit both the Backdoor Roth IRA and the Mega Backdoor Roth 401(k) by prohibiting rollovers of after-tax amounts to Roth-type plans.

Disqualified persons

IRA owners and beneficiaries (if owner has died) would be treated as disqualified persons for purposes of the IRS prohibited transaction rules as per Internal Revenue Code Section 4975, as under the BBB bill.

FSC/DISC proposal

The proposal would prohibit an IRA from holding an interest in a DISC (Domestic International Sales Corporation) or an FSC (foreign sales corporation) that receives a payment from an entity owned by the IRA owner; whether an entity is owned by the IRA owner would be determined by substituting 10% for 50% in the constructive ownership rules.  This provision resembles a similar provision in the BBB bill.

Six-year statute of limitations in certain cases

A six-year statute of limitations would apply in the following instances:

• In the case of a substantial error in reporting on a return the value of IRA assets. 
• In the case of a prohibited transaction.

This provision mirrors a similar provision in the BBB bill.

Conclusion

The 2024 proposed Biden budget is essentially dead-on arrival with a Republican-controlled Congress.  Nevertheless, it is important to get a clear understanding of the type of tax policies the Biden administration is focused on going forward.  The great news for Self-Directed IRA investors is that the budget does not include any provisions limiting the ability of retirement plans to invest in alternative assets.

We will keep you updated as we’ll certainly see changes coming to the proposed budget. Obviously, a lot will depend on the upcoming presidential election.