You may have heard that some folks in Congress are threatening to squash the so-called ‘Backdoor Roth IRA,’ as the legislature debates passage of the Build Back Better bill, a multi-trillion dollar social welfare and spending proposal.
What exactly is the Backdoor Roth IRA?
For a quick overview, check out our recent blog story about Backdoor Roths.
In brief, a Backdoor Roth IRA refers to a technique allowing a person, who makes too much money to contribute to a typical Roth IRA, to fund a regular IRA or 401(k) with already-been-taxed money, then convert those dollars to Roth IRA funds without paying additional tax. It’s totally permitted under current tax rules, although perhaps not exactly what was intended by the original Roth creators.
I recently spoke with financial reporter Jeanne Sahadi of CNN Business on how potentially losing the Backdoor Roth IRA provision might affect our clients, and the retirement strategies we recommend. (As a reminder, the elimination of Backdoor Roths is only a PROPOSAL in the Build Back Better bill and is not yet, and may never become, law).
If you’re concerned about the potential elimination of the Backdoor Roth strategies, here’s the comments I shared with Jeanne during our interview.
I don’t think losing this technique will move the needle for our clients or cause any meaningful disruption. In reality, I have seen surprisingly few clients execute mega Backdoor Roth strategies over the years. There are some very legitimate cases where we have had clients execute small, annual Backdoor Roth contributions, and we will all be sorry if those are eliminated, as they do help clients contribute to their retirement nest egg. Frankly, I’m all for anything that encourages people to save more. That’s just Financial Responsibility 101.
“Save consistently, spend moderately and invest for the long-term. The only advice I would add? Stay nimble. Tax rules change, so stay flexible and avoid committing to any financial strategy that can’t easily be undone when the tax regime changes.”
The Takeaway: We continue to monitor tax developments in Washington and will advise clients of any breaking news. For the moment, with less than one month to go, it looks like – with a few exceptions – any profound changes to tax brackets, estate tax limits or other issues of importance to clients will have to wait until next year.
Read our previous articles:
“Gift And Estate Tax Changes For 2022: What You Need To Know”
“White House Tax And Spending Bill Takes Final Shape”