Backdoor ROTH IRA strategy may not last

[SecondCor521]

Your interpretation would certainly be make it a non-event for me and I admit I am in over my head trying to understand the bill. But reading the text of the bill I quoted above seemed to prohibit the entire transaction? Is there an expert analysis somewhere on this point (just occurred to me that you are thefinancebuff.com proprietor - I read that site regularly and thanks for the feedback! )

I'm an amateur, but my reading of the bill from a few weeks ago agrees with yours - the entire transaction would be prohibited for everyone.

But the bill has gone through several iterations and will probably go through at least a couple more, and several of those have been major revisions, so personally I'm just waiting to see what happens before getting too concerned about whatever is in the bill.

Of course, if people feel strongly they should let their elected representatives know their opinion. I already know that my elected Congressional representatives will be voting the way I want them to, so this is a NOP for me.

 

[tulak]

This is a PSA for others that might want to change their 401k after-tax contributions for 2022 in case Mega Backdoor Roths go away in 2022.

We're coming up to the end of the year and I decided to stop after-tax 401k contributions. There's still a chance the BBB legislation might pass, which would prevent conversion, and I don't want to deal with any 2022 after-tax contributions in the 401k if this passes.

I'm going to wait until were a month or two into 2022 and see what happens. If the legislation doesn't pass, or is changed, then I'll start up contributions again. Otherwise, it was good while it lasted.

 

[Montecfo]

You may have misread a zero in compounding! $350K compounded at 5% for 30 years is $1.5M. May be you assumed future contributions. By the way, the Roth conversion rule is an unintended goof up by congress while trying to stop people who held start up shares in Roth IRA which were funded by mega-backdoor contributions channeled from 401K. They want to stop future funding of Roth for everyone because the startup C-suite employees can have artificially low income for years because they are awarded huge RSUs/Options which will vest in the future. Lot of these C-suite guys can fly under the radar of "middle class" paper income for years while building up the shares in IRAs. That is how they can end up with million/billion dollar IRAs in couple of decades down the road. Unfortunately the proposed change will affect all highly compensated individuals who are just the worker bees without RSUs/Options.

In the rush to demonize a few startup execs, I really wonder if anyone calculated the excess taxes paid to the treasury when the startup failed, the Roth became worthless and there was no tax deduction. This is probably the typical case. Most startups fail.

 

[pjigar]

This is a PSA for others that might want to change their 401k after-tax contributions for 2022 in case Mega Backdoor Roths go away in 2022.

We're coming up to the end of the year and I decided to stop after-tax 401k contributions. There's still a chance the BBB legislation might pass, which would prevent conversion, and I don't want to deal with any 2022 after-tax contributions in the 401k if this passes.

I'm going to wait until were a month or two into 2022 and see what happens. If the legislation doesn't pass, or is changed, then I'll start up contributions again. Otherwise, it was good while it lasted.

The last version of the bill allowed Roth IRA conversion of after-tax 401K/IRA contributions until December 31, [-]2031[/-]2021. I am still continuing the after-tax 401K contributions until the bill passes one way or the other. I did, however, increased my differed compensation in case bill passes and conversions goes away. The differed compensation changes are only allowed once a year during plan offering period but 401K contributions can be changed anytime.


Edit: Corrected incorrect date.

 

[JoeWras]

The last version of the bill allowed Roth IRA conversion of after-tax 401K/IRA contributions until December 31, 2031.

I don't believe that statement is true.

Here's the text: https://www.congress.gov/bill/117th-congress/house-bill/5376/text

Search on "138311". The part of the law is in section 138311. It is broken into two subsections a) and b).

Section a) has a date of December 31, 2021. Section b) has the 2031 date.

Section b is the "rich people" section disallowing rollovers and conversions of any type a decade hence for high income earners.

Section a is the key section for everyone and reads with typical lawyer negative logic. Here's what it says:

SEC. 138311. TAX TREATMENT OF ROLLOVERS TO ROTH IRAS AND ACCOUNTS.
(a) Rollovers and Conversions Limited to Taxable Amounts.--
(1) Roth iras.--
...
(B) Conversions.--Subparagraph (C) of section 408A(d)(3) is amended by adding at the end the following new sentence: ``This subparagraph shall not apply if any portion of the plan being converted would be treated as not includible in gross income if distributed at the time of the conversion.''
(3) Effective date.--The amendments made by this subsection shall apply to distributions, transfers, and contributions made after December 31, 2021.

People smarter than me have tied this back to the more easy-to-read Ways and Means document which more clearly says after-tax of any type is done at the end of 2021.

Of course, I'm guessing this date will slip by a year when the Senate reconciles. It could be retroactive, but is unlikely. That's just my opinion. The point is, the House passed the 2021 date.

Need another opinion? Check out this brand new CNN business article.
https://www.cnn.com/2021/12/13/success/backdoor-roth-ira-end-of-year-move-feseries/index.html

If the Build Back Better bill, passed by the House in November and now under consideration by the Senate, becomes law, it could limit high-income savers' options to convert their savings into Roth IRAs and Roth 401(k)s, which offer tax-free withdrawals in retirement.
The most immediate restriction, unless lawmakers amend the date, would start in 2022, when you would no longer be allowed to convert after-tax contributions -- say from a non-deductible IRA -- into a Roth.

 

[JoeWras]

I've had after tax money in my IRA since the 90s, even before Roth came around. The original plan was it would be a nice bonus to have a portion of an untaxed distribution some day. If I take no action, that would still be the case.

Roth came along and the plan was to convert this over a few years, while still staying below the 22% bracket. I started that plan last year since I'm now retired.

Due to this bill, I sped up my plan and converted all my IRA with after-tax money (and also rolled over a conduit IRA into my 401k to get rid of the basis) this year. Did this for both me and DW.

Because it pushed us slightly into the 24% bracket, I decided this was a good year to contribute to our DAF with bunched contributions (one tax year ahead of original plan). This dropped us back into the 22% bracket with room.

I can't trust what Congress will do. It is pretty clear that if they pass BBB in some form, this is likely to survive, if even next year. But I'm not taking that chance. I ripped the bandage off and got it done.

I encourage anyone out there who has after-tax money in an IRA sitting around to consider taking action. Time is running out. I foolishly ignored this bill for months because I believed the summary headlines which said: "Only rich people making over $400k are affected." Nope. It was a real wake up call to find out we are all affected by section a of the bill.

Just be careful and know how the pro-rata rules apply.

 

[pjigar]

I don't believe that statement is true.

Here's the text: https://www.congress.gov/bill/117th-congress/house-bill/5376/text

Search on "138311". The part of the law is in section 138311. It is broken into two subsections a) and b).

Section a) has a date of December 31, 2021. Section b) has the 2031 date.

Section b is the "rich people" section disallowing rollovers and conversions of any type a decade hence.

Section a is the key section for everyone and reads with typical lawyer negative logic. Here's what it says:

People smarter than me have tied this back to the more easy-to-read Ways and Means document which more clearly says after-tax of any type is done at the end of 2021.

Of course, I'm guessing this date will slip by a year when the Senate reconciles. It could be retroactive, but is unlikely. That's just my opinion. The point is, the House passed the 2021 date.

Need another opinion? Check out this brand new CNN business article.
https://www.cnn.com/2021/12/13/success/backdoor-roth-ira-end-of-year-move-feseries/index.html

Your read is correct. I picked up the incorrect date (December 31, 2031) from section about 409(B) plan conversions.

 

[SecretlyFI]

When do we think we will know if backdoor Roth’s are still allowed in 2022? I normally do mine this week for the new year.

 

[cathy63]

When do we think we will know if backdoor Roth’s are still allowed in 2022? I normally do mine this week for the new year.

It's legal right now and will still be legal on Monday. I think it's very unlikely that these transactions will be disallowed for tax year 2022. That would create a catch-22 for people who do conversions early in the year that are then retroactively disallowed, because there's currently no way to undo them. The new law could be written to allow for recharacterization of a conversion in this year only, but that's adding a lot of complexity for financial firms and the IRS.

It's not impossible that they could be disallowed though. If you want 100% certainty, you'll have to wait until Congress adjourns for the year sometime in December.

 

[tulak]

After BBB didn’t pass, I changed back my after-tax contributions to make use of the mega backdoor roth.

I’m betting that if the law is changed, it won’t be for 2022. Hopefully I’m right.

 

[AginMS]

This article does a great job analyzing whether executing a backdoor Roth in 2022 is a good or bad decision based on what is currently known.

2022 Backdoor Roth IRA – The FI Tax Guy

Basically it walks you through six possible outcomes and it is the author's opinion that you are more likely to benefit from executing an early Backdoor Roth IRA than to be ultimately harmed by it. Of the six scenarios, only one of them results in paying a 6% tax penalty for excess contributions (and he assigns a low probability to this outcome).

I was on the fence due to the uncertainty of the BBB bill, but having read the article I will go ahead and execute DW and my 2022 backdoor Roths this month. Hopefully it won't be our last!

 

[pastoral]

It's 2024 now, is there any news about backdoor Roth? (I haven't been following)