25 Nov Will ‘Build Back Better’ eliminate the backdoor Roth IRA?
Q. With the “Build Back Better” bill passing the House, will the backdoor Roth conversion be eliminated? I am not talking about the mega conversion, or the after-tax conversion, but plain old “I rolled over $15,000 from a 401(k) to a traditional IRA and I want to convert that to a Roth.” I read something where it’s allowed for people below $400,000 of income.
A. First, to be clear, the Build Back Better bill at this point has only been passed by the House of Representatives.
It’s got a long way to go before it becomes law.
It will have to make it through the Senate — or be changed by the Senate and sent back to the House, and ultimately be signed by President Joe Biden.
The current version of the bill includes four retirement provisions, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
“The first is a limitation on future traditional IRA or Roth IRA contributions for taxpayers whose IRA and defined contribution plan balances exceed $10 million and whose income exceeds $450,000 for married filing joint and $400,000 for singles,” he said. “This new provision is not slated to go into effect till after Dec. 31, 2028.”
A second provision in the bill requires individuals with retirement account assets of more than $10 million and the same income levels mentioned above to take a 50% distribution of assets above the $10 million threshold, Maye said.
Just like the first provision this change would become effective after Dec. 31, 2028.
The third and fourth provisions directly relate to your question.
Going forward, Roth conversions, or backdoor Roth conversions, would no longer allowed for taxpayers whose income exceeds $450,000 (married filing joint) and $400,000 (single), he said. This provision does not go into effect until after Dec. 31. 2032, so there is plenty of road to do Roth conversions prior to then, Maye said.
Finally, the bill does ban “Super Roth” conversions, meaning that individuals would no longer be able to contribute $19,500 (2021) pre-tax to a 401(k) and up to $38,500 in after-tax contributions. Currently, the after-tax dollars can be converted to a Roth IRA, he said.
“As long as the reader’s income does not exceed the $450,000 (married filing joint) or $400,000 (single) limits, they are good to continue to do Roth IRA conversions,” Maye said. “However, I would encourage them to make sure it makes sense to do so.”
For example, he said, consider whether you have money outside of the IRA to pay the taxes owed on the conversion, how long would the assets going to be held in the Roth IRA and are you already in a low federal marginal tax rate.
“Finally, we will have to wait and see what the actual final bill says when it is signed, sealed and delivered,” Maye said.
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This story was originally published on Nov. 25, 2021.
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