The super rich use 401(k)s and IRAs to sidestep taxes on millions of dollars. This proposed law would cut them off

The proposal targets individuals with modified adjusted gross incomes of more than $400,000, and would cap contributions to traditional or Roth retirement plans if they have more than $10 million in tax-sheltered retirement accounts.

With private-employer pensions becoming uncommon over the past few decades, IRAs and defined contribution accounts, like the 401(k) plan, have grown in popularity as a way to save for the future. Not all workers have access to a workplace retirement plan, but if they do, it comes with higher contribution limits than an IRA. These plans can serve specific tax purposes, as well. With traditional accounts, pre-tax contributions grow with returns over time until they’re taxed at distribution; with Roth accounts, after-tax dollars are used but distributions are tax-free later in life. Traditional IRA contributions can be tax-deductible, though that benefit is phased out for high-income earners.

“Tax-preferred retirement accounts are not supposed to be a loophole for the ultra-rich to shelter immense fortunes, they’re a lifeline for working Americans who may not otherwise have a dignified retirement,” said Wyden, a ranking member of the Senate Finance Committee. “Individuals worth hundreds of millions or billions of dollars do not need any taxpayer subsidy to save, so we need to close this loophole and focus the taxpayer subsidies for retirement savings on the people who really need the help.”

The annual contribution limit for 401(k) plans is $24,500, or as much as $35,750 for people ages 60 to 63, if their plans allow. Employee and employer contributions can’t exceed $72,000 in 2026. It would take decades of maxed-out employee and employer contributions, as well as significant investment returns, to even attempt to come close to the tens of millions of dollars that some of the ultra-wealthy put away in these retirement accounts.

Critics also argue some of these individuals are using tax-advantageous retirement accounts to purchase undervalued shares of nonpublic companies, a strategy that allows these investors to remain within contribution limits but reap tax benefits unavailable in other typical investment accounts, the Wall Street Journal reported.

By the end of 2024, 208 individuals had a total of more than $85 billion in tax-sheltered retirement accounts, with an average balance of $409 million each, according to the Joint Committee on Taxation. And more than 32,000 individuals had more than $10 million each in tax-sheltered retirement accounts, with an average balance of $17 million. 

“Senator Wyden and Representative Neal’s proposal helps address a tax preference that disproportionately benefits households with exceptionally large retirement accounts rather than the typical retirement saver,” said Dan Doonan, executive director of the National Institute on Retirement Security. “Instead of using these accounts to fund retirement, some wealthy households can leave assets growing tax-advantaged for decades, delaying taxes on traditional accounts and, in the case of Roth accounts, potentially avoiding tax on investment gains altogether.” 

What the proposal says

Under the proposed legislation, contributions to tax-favored retirement accounts will be capped for individuals with more than $10 million in these accounts and modified adjusted gross incomes of more than $400,000 (or married taxpayers filing jointly with MAGI of more than $450,000). If passed, it would become effective after Dec. 31, 2033.

Those with elevated MAGIs will have to make minimum distributions, the legislators said. Individuals would have to withdraw 50% of any balance over an aggregate $10 million between their traditional IRA, Roth IRA and defined-contribution plans. Those with aggregate balances of more than $20 million could have to distribute as much as the entire excess balance from their Roth IRAs and the Roth portion of their defined-contribution plans. 

Why the focus on mega retirement accounts?

These retirement accounts are meant to help workers save for their futures, but the ultra-wealthy use them to avoid paying taxes right away, the legislators argued. Tax breaks amounted to almost $250 billion last year, according to a Wall Street Journal analysis of the Joint Committee on Taxation. 

This is not the first time government officials have looked to cap retirement account balances. A proposal under the Obama administration suggested capping total tax-advantaged retirement balances to a little more than $3 million. Similar to Wyden and Neal, the Biden administration proposed a cap on aggregate balances of more than $10 million.

“Our retirement savings system is built on incentives to help workers achieve financial security after a lifetime of work — not on loopholes for the wealthiest to exploit,” Neal said. “At a time when millions of workers still struggle to save enough for retirement, there is no justification for taxpayer-subsidized multimillion-dollar accounts. Closing these loopholes is a matter of basic tax fairness, and Congress must restore this savings vehicle to its intended purpose.”