Yahoo Finance: Democrats want to cut way back on those ‘backdoor Roths’

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By: Ben Werschkul

Funding a Roth IRA through the “backdoor” has been a favorite move of aggressive savers in recent years.

But the benefit may be much less prevalent if Democrats pass their ambitious multitrillion-dollar budget reconciliation bill.

The backdoor Roth maneuver lets a high-income earners contribute money to a traditional IRA and then convert it into a Roth to skirt income limitations in the Roth program, but still take advantage of the tax benefits. Once the move is made – and the relevant taxes are paid upfront – the retirement account can grow and won’t be subject to taxes again (earnings can grow tax-free, and qualified withdrawals are tax- and penalty-free).

The Democrats’ plan, however, would scale back Roth conversions, and completely eliminate the ability for the richest Americans to convert traditional IRAs into Roth IRAs by 2032. Right now, individuals with an income above $140,000 are not permitted to make Roth IRA contributions directly. The change would mean that wealthier Americans – individuals with a taxable income over $400,000 or couples filing jointly with taxable income over $450,000 – wouldn’t be able go through the backdoor to make a conversion.

A related maneuver called the mega backdoor Roth IRA would be eliminated even sooner. This move allows employees in certain retirement plans make an after-tax contribution to their 401(k) that they then roll into a tax-protected Roth. That move would be eliminated by 2022 and apply to everyone, regardless of income level.

Read the full story here.

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