Updated: Nov 9, 2021
2021 might be the final year to take advantage of this strategy
What is a Backdoor Roth IRA?
It's a strategy used to help high income earners take advantage of the Roth IRA, a tax-free retirement vehicle intended for low and middle income earners. Those earning over $206,000 in 2021 aren't able to contribute directly into a Roth IRA. Although, backdoor contributions could be made. This is done by setting up a traditional IRA and then converting it into a Roth IRA, thereby protecting the investor's withdrawals from taxes. If properly organized the conversion doesn't generate any tax.
The government is closing the backdoor
In newly proposed legislation "the House Ways and Means Proposal" it's stipulated that after Tax money will no longer be eligible for conversion to Roth IRAs. Thus closing the loophole. (1) This legislation has not yet passed.
Why are they now under examination?
The stipulation also affects "mega backdoor Roth" conversions which involves converting workplace plans. Roth IRAs have been under scrutiny from legislators recently. According to data released by congress in late July 2021, Roth IRAs containing over $5 million had tripled between 2011 & 2019 and some feel this is evidence of the wealthy using loopholes including the backdoor IRA strategy to avoid paying taxes. (2)
Is this final?
This legislation has not yet passed, but if you may be affected, you should consult with a licensed financial professional.
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