One of the most lucrative tax loopholes for the wealthy likely has only two weeks to live, thanks to draft legislation released by the Senate on Dec. 11. For less-affluent investors, a version of the benefit gets another decade of life.
Come 2022, the hatchet would drop on the ability of all investors to sidestep their way into
Regular, straightforward conversions that don’t involve the “backdoor” route would still be allowed — a lucrative opportunity, given that there are no income limits on Roth conversions. But come 2032, higher earners would be locked out of those as well. Another proposed curb in the Build Back Better bill would come earlier, in 2029, and ban people who make $400,000 ($450,000 if married) and who have total retirement savings over $10 million from contributing to IRAs.
“You can still do a backdoor conversion between now and Dec. 31, but the window is very likely to close,” said Robert Polans, a founding shareholder of accounting and tax consulting firm Drucker & Scaccetti in Philadelphia. “Backdoor Roths are dead.”
Floodgates
Roth plans began life more than two decades ago as a savings tool for middle-income earners — a taxpayer today has to earn
In their basic form, taxpayers within those income limits can open a Roth account and put in after-tax dollars —
By contrast, a traditional IRA is funded with dollars on which taxes haven’t yet been paid. So when its owner makes withdrawals or takes distributions, she pays ordinary income tax rates on the gains. Traditional IRA contributions (the same levels as for Roth IRAs) are deductible, but Roth ones are not.
Crucially, IRS rules
Thus was born the so-called
When things went ‘mega’
Affluent earners can stuff the piggy bank further by making after-tax, non-deductible contributions to their traditional IRAs, then rolling them into a tax-free Roth. While the IRS
In
Relatively few Americans have sizable retirement plans. Just over 28,600 taxpayers held IRAs, both traditional or Roth, with balances of at least $5 million — the IRS’s definition of a “mega” account — in 2018, according to a nonpartisan Joint Committee on Taxation
The study didn’t indicate if those were the product of conversion, but their size would seem to indicate that they are, given the direct contribution limits to regular Roths. By contrast, more than 7.1 million ordinary-income taxpayers made direct contributions to Roths in 2018, according to the most recent IRS
Which means that in the emerging tax bill, “Roths are minorly dead,” said Slott, who is based in Rockville Center, New York, and trains financial planners on retirement planning. He estimated that “maybe 5%” of all conversions are of the backdoor variety, meaning by wealthier earners. “So just live with it.”
More significant, Slott said, is the 10-year window to continue regular conversions, which can run into millions of dollars and more. “You’re probably going to accelerate those before 2032. Congress has given you a heads up.”
Polans said that many high net worth clients typically wait until the April return filing deadline to fund Roth contributions for the prior year. That won’t work this time. “The time to fund an IRA with after-tax contributions and convert it to a Roth is now,” Drucker & Scaccetti wrote in a Dec. 14