WRITTEN BY: GIDEON DRUCKER, CFP® AIF® ECA
Before I jump into what is going on with the Mega Backdoor Roth IRA, I want to let you know that on Tuesday, October 19th I am offering a specialized webinar 📢 for anyone working in tech & media. 💻
The webinar is designed for professionals who have advanced equity compensation benefits offered through their employer. If this sounds like you, you won't want to miss out! Click here to learn more.
On the planning side of things… I wanted to get my thoughts out about the proposed legislation that affects some of the tax planning strategies that we implement with many of our clients. If you have not yet booked a Right Fit Call with me you can do so here.
I rounded up my 5 key takeaways and how it may affect my favorite people, our Wealth Builders!
5 key Takeaways On the Proposed Tax Legislation:
- This was only the first draft of the legislation.
A lot needs to happen for this to go into effect. So consider this my official caveat & desire to “wait and see” a bit before we start making changes.
- This proposed change would eliminate the ability to do a Backdoor Roth IRA.
As you likely already know, a backdoor Roth IRA is when we park After-tax dollars into your Traditional IRA and then convert them into a Roth IRA. We are able to do this so without a tax consequence because the funds come from after-tax dollars….and that’s the “backdoor” nature of the Backdoor Roth IRA. If this new legislation goes into effect, after-tax amounts in retirement accounts will no longer be eligible for this exact type of conversion into a Roth. They would have to remain in the After-Tax account.
- We would no longer be able to do the Mega Backdoor Roth IRA.
Again, a brief reminder: A Mega Backdoor Roth IRA is when we contribute money to your After-Tax 401k (only if your company offers one) and then convert the funds into either the plan’s Roth 401k or a Roth IRA held over here.
- In either case, we would STILL be able to contribute money to these After-Tax accounts.
We just wouldn’t be able to convert them into a Roth. Consider this like getting half of the tax break or a slice of cake instead of the whole thing! Money that goes into after-tax 401k’s or IRA’s still GROWS tax deferred, it’s just that without being able to move into a Roth IRA, you will have to pay taxes at distribution/retirement on the earnings. Again, this is still tax-deferred savings…just not as great as getting the money into the Roth like we do now.
- If you are in the highest income bracket, ($400k Single; $450k MFJ), you will no longer be able to complete Roth conversions.
As a quick refresher, a Roth conversion is when we take Pre-Tax IRA money, pay the taxes up front, and then convert the full amount into a Roth IRA. So if we were to convert $100g of your Traditional IRA this year…you would effectively owe $25g in taxes come tax time, and the full $100g would find it’s way inside your Roth IRA…these funds then get to grow tax-free and distribute free in retirement (provided you followed the rules.) If this comes to pass the government would be eliminating the ability to perform this strategy…but ONLY if you are in the highest tax bracket. This is different than the elimination of Backdoor contributions which is true for EVERYONE currently in need of doing a Backdoor Roth.
So what does this all mean for existing clients? 🤔
- If this comes to pass, we’re going to take a look throughout this upcoming quarter to see if it makes sense to convert your existing Pre-Tax IRA’s and convert them into Roth IRA’s.
Again time is only of the essence here if you are in the highest tax bracket…otherwise you are still eligible to do this next year like normal.
- We will look to complete your 2021 backdoor Roth IRA’s prior to January 1 2022.
Usually we do so anyway (though technically you have until April 15th of the following year) but this year we will be extra motivated to get those contributions in ahead of time. We will look to do the same if we are contributing to your After-Tax 401k as well!
✅We will adapt, as we always do.
If this all comes to fruition, we will continue to update your game plan & we’ll continue to look to maximize your saving strategies in the best ways available to you.
While thinking about taxes and tax planning is fun/exciting…I’ll remind you that a far greater effect on your financial future is this,
👉...how much you’re able to save and how committed you are to staying the course even as the world changes around us!
If you have any questions about your financial world, please set up a time to connect and Book a Right Fit call with me here.