Editor’s Note: This article first appeared on SmartAsset.com
The backdoor Roth IRA is a tax loophole that Democrats in Congress want to close.
One of several proposed changes aimed at wealthy Americans’ retirement accounts, Democrats on the House Ways and Means Committee want to make it illegal for people earning more than $400,000 per year to convert pre-tax retirement savings accounts into Roth IRAs.
The proposed reforms are part of a Democratic push to raise taxes on the wealthiest Americans to help pay for a three-year budget deficit.Plan to spend $5 trillion
Backdoor Roth IRA Conversions: Definition and Proposed Elimination
Individuals earning more than $140000 per year are currently prohibited from contributing to a Roth IRA, which allows them to grow their retirement savings tax-free.
Workers who earn more than this amount have been able to convert their pre-tax contributions into a Roth IRA since 2010.Their retirement savings grow tax-free after they pay income taxes on the initial contributions and gains, and they are no longer subject to required minimum distributions (RMDs).
Backdoor Roth conversions, which have become increasingly popular, allow high-income earners to avoid the income requirements for Roth IRAs and take advantage of the tax-free growth these accounts provide.
However, this strategy’s use may be coming to an end.Democrats on the House Ways and Means Committee want to make it illegal to convert to a Roth IRA if you earn more than $400,000.The rule change, if approved, would apply to distributions, transfers, and contributions made in taxable years beginning after December 31.2031 31
Mega backdoor Roths, a sophisticated strategy that allows people enrolled in certain retirement plans to save up to 38500 in extra after-tax contributions for retirement, are also set to be phased out under the proposed legislation.
If passed, the provision targeting massive backdoor Roth conversions would go into effect after December.31st of December 2021
Contributions to IRAs are now subject to new restrictions.
Democrats also want to make it illegal for high-income taxpayers to accumulate tax-deferred wealth in retirement accounts.
They plan to do so by prohibiting people with incomes above certain thresholds from contributing to Roth and traditional IRAs if they already have $10 million in IRAs or other defined contribution retirement accounts.Taxpayers can contribute to IRAs regardless of how much money they already have saved under current law.
The proposed contribution cap would apply to single or married taxpayers who file separately and earn more than 400000 dollars in taxable income, married taxpayers filing jointly who earn more than 450000 dollars in taxable income, and heads of households who earn more than 425000 dollars in taxable income.
The proposed crackdown comes as the wealthiest Americans’ retirement accounts continue to grow.According to the Government Accountability Office, at least $5 million was saved in IRAs by 9000 taxpayers in 2011.The number had more than tripled to over 28000 eight years later, according to data from the Joint Committee on Taxation.
Employer-sponsored defined contribution plans would also be required to report balances of more than 2 percent of their assets under this section of the Democratic proposal.5 million to the Internal Revenue Service and the plan participant with a balance of more than 2 million dollars.5 million dollars
Accounts with a balance of more than ten million dollars must make a minimum distribution.
Democrats also propose that high-income earners with more than $10 million in retirement accounts be required to take minimum distributions.
A minimum distribution would be required for the following year if an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, according to the proposal.
Under the proposed legislation, high-income earners with more than $10 million in retirement accounts would be required to take a distribution equal to 50% of their excess savings.
Joan, for example, would be required to take a 1 million distribution the following year if she has 12 million in her 401(k) plan and various IRAs.
The income thresholds would be the same as those proposed to limit IRA contributions by the wealthy.Both provisions would take effect after December if approved.31st of December 2021
Wealthy Americans’ retirement accounts may be subject to significant changes.
Democrats on the House Ways and Means Committee want to ban backdoor Roth IRA conversions, make it illegal for high-income earners with more than $10 million in retirement accounts to contribute to their IRAs, and make it mandatory for certain high-income earners with large retirement savings to take annual distributions.
A financial adviser can assist you in interpreting potential legislative changes in Washington and how they may affect you.Now is the time to find an advisor.
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