Backdoor ROTH IRA strategy may not last

[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]

Quote:

Originally Posted by JoeWras I don't believe that statement is true. Here's the text: https://www.congress.gov/bill/117th-...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/succe...ies/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]

Quote:

Originally Posted by 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.

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)