Roth’s backdoor restrictions have been suspended – for now
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The main benefit of Roths is the ability to invest in after-tax contributions that will increase both tax-free and withdrawn tax-free. It is a good option if you plan to be in a higher tax bracket in retirement or want more flexibility in deciding when to use different pots of money for different purposes in retirement or at any other time.
Under current law, if your modified adjusted gross income is $ 140,000 or more ($ 208,000 if you are married and filing jointly), you cannot contribute directly to a Roth IRA in 2021. And if you’re covered by a workplace pension plan and your income is $ 76,000 or more ($ 125,000 if you’re married), you aren’t allowed either. to make deductible contributions to a traditional IRA.
But you can still put money in a Roth IRA using a “backdoor” strategy of converting your after-tax contributions into a non-deductible IRA. Annual IRA contributions are capped at $ 6,000 ($ 7,000 if you’re 50 or over).
Corn a provision included in the Build Back Better bill would prohibit taxpayers of all income levels from converting their after-tax savings to a Roth IRA or Roth 401 (k) starting next year. Then, a decade later, the door would close entirely on high-income people contributing to Roths.
Dead for now, but not necessarily forever
When it comes to revenue raising provisions to help fund big lawmakers’ initiatives, never assume they are definitely killed off, even if a given bill does not become law.
And don’t assume that an amended version of the Build Back Better bill might not pass at some point next year.
The question is, when will the restrictions on Roths backdoors come into effect?
No one can say for sure, but if some version of the BBB invoice passes next year, it’s more likely than not that the effective date – at least for Roth 401 (k) restrictions – will be pushed back to 2023.
“All 401 (k) plans require employees to choose how much to carry over to the pre-tax portion or the Roth portion before income is earned. I don’t see how Congress could change the use of Roth 401 ( k) retroactive [to January 1, 2022]”said Mary Kay Foss, certified public accountant based in California.
Given all the uncertainty, Foss said, “my advice would be to keep doing what you’ve been doing and hope for the best.”
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