What the New Tax Proposals Mean for Roth Conversions

Monday, October 04, 2021

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on Twitter: @theslottreport

It’s hard to keep up with the news out of Washington these days! We have been getting a ton of questions on how the new tax proposals recently passed by the House Ways and Means Committee would impact Roth conversions. Here is the rundown.

After-Tax Conversions

Congress is looking to slam the door on the so-called “back door Roth IRA” and “mega back door Roth IRA” strategies. The key point to understand here is that these strategies involve conversions of after-tax dollars. For example, currently the back door Roth IRA conversion allows an individual to make a nondeductible after-tax contribution to a traditional IRA and then convert it tax-free to a Roth IRA. This is a way that higher earners can avoid the Roth IRA contribution limits and fund a Roth IRA.

The current proposals would end this strategy. It would also shut down the strategies of funding an employer plan with after-tax dollars and converting them to a Roth IRA or converting them to a Roth account within the plan.

These types of conversions would be outlawed beginning next year. This would apply to everybody, regardless of income.

Pre-tax Conversions

Many conversions do not involve after-tax dollars at all. Instead, they involve pre-tax funds that when converted result in a tax bill. These types of conversions would be allowed to continue next year. Congress loves the revenue they bring in and is not ready to quit them yet. Instead, pre-tax conversions would be subject to income limits beginning 10 years down the road, starting for 2032. The ability to convert pre-tax dollars would be eliminated for taxpayers with income over $400,000 if single and over $450,000 if married.

IRA owners with long memories may remember that Roth IRA conversions had an income limit in the aughts. Congress is looking to return to the bad old days and bring it back …. but not for ten years.

What You Can Do Now

First, take a deep breath and remember that right now we only have proposals. As anyone who watched School House Rock on Saturday mornings as child can tell you, it is a long path before a bill becomes a law.

However, it is smart to recognize that Roth conversions are on Congress’s radar. If you have been on the fence about converting to a Roth, 2021 may be your year. For back-door Roth conversions, it may be your last chance. For pre-tax conversions, the time might be right too. Congress is taking aim at the tax code, and current rates and rules may not be around for long.

Post Views: 18
Posted in: , , ,

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.