How the New Tax Proposal Might Affect Roth IRA Conversions
Waiting for a bill to pass Congress in today’s political climate is akin to waiting for a child to do his or her chores. There’s a good chance it won’t happen, and if it does, it isn’t going to look as good as you hoped. It’s already up-in-the-air as to whether the new $3.5 trillion dollar Build Back Better Act will actually pass both the House and the Senate, and even if it did, it would be the same as it is now. However, speaking for the present, if the bill were to pass as it is today, it could have a serious impact on Roth IRA conversions.
The maximum contribution to Roth IRAs in 2021 is $6,000 (so if you haven’t made a contribution yet, please do so quickly). However, your adjusted gross income has a large effect on how much you can contribute. For example, if you are married and are filing together as a couple, and if your income exceeds $196,000 but is less than $206,000, you cannot contribute the max of $6,000, but rather a reduced amount. If you and your spouse have an AGI (adjusted gross income) of more than $206,000 ($139,000 if single), you cannot make a contribution to your Roth IRA.
What higher income earners have done in previous years to make the contribution is use something called a “back-door” Roth IRA conversion. Those with incomes too high to make a Roth IRA contribution simply make their contributions to their traditional IRAs, then simply convert that money in their IRA to their Roth IRA, thereby making a Roth IRA contribution without technically making a “contribution”. Under the new bill being pushed by House Democrats, Roth IRA conversions would be prohibited for any individual with an income exceeding $400,000 ($450,000 for married couples).
Whether the Build Back Better Act will pass with these provisions remains to be seen. If the bill were to pass with these requirements still intact, it would not take effect until 2031. While this bill may not impact individuals retiring within the next 10 years, it could greatly affect how the next generation of retirees plan their retirement.
