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Is The Backdoor Roth IRA Conversion Strategy Over?

As part of the Build Back Better Bill approved in November 2021, changes are coming to the rules for using a backdoor Roth IRA conversion. If you are considering a ‘backdoor’ Roth IRA conversion or are curious about what it is, this article will help you understand the changes coming to this strategy in 2022.

How a roth IRA works:

Roth IRAs are funded with after-tax dollars, and withdraws later are federal tax-free, regardless of how much your investment has gained. With investors required to pay taxes on their pre-tax contributions and accumulation in other types of retirement savings vehicles, the Roth IRA is an option that offers a tax-free benefit to qualifying investors. 

Roth IRAs have income limits for those who wish to invest in a Roth IRA retirement savings account. Single people with an adjusted gross income (AGI) greater than $140,000 in 2021, and married couples filing jointly, who made more than $208,000 in 2021, were blocked from directly contributing to a Roth IRA per IRS rules. 

For 2021, Roth IRA limits were $6,000 for investors under age 50 and $7,000 for investors over age 50. Roth IRA contribution limits will be the same for 2022.

What is a backdoor roth iRA conversion?

Investors making more than the Roth IRA limits have used a strategy called a ‘back door’ Roth IRA conversion since 2010. Backdoor Roth IRA conversions are beneficial to high earners whose annual income (plus access to workplace retirement plans) makes them ineligible for tax deductions for traditional IRA contributions or unable to contribute to a Roth IRA. 

To do a backdoor Roth IRA conversion, you open a new traditional IRA, make nondeductible contributions, and convert it into a Roth IRA. Although you still need to follow the annual IRA contribution limits, there are no income thresholds. Anyone can convert traditional IRAs to Roth IRAs, regardless of annual income.

things to consider about backdoor roth iRAs”

  • If you are considering a Backdoor Roth IRA, be aware that there is pending legislation that Congress may pass limiting this strategy after 2021. 
  • The use of Roth IRA conversions by high-income taxpayers would eliminate in 2032 if passed.
  • A Backdoor Roth IRA may incur higher tax when established but the investor will receive the future tax savings of a Roth account.
  • A Backdoor Roth IRA conversion is a strategy for assets initially contributed to a regular IRA that is now in a Roth IRA after an IRA conversion.
  • A Backdoor Roth IRA is a legal way to get around the income limits that usually prevent high earners from contributing to a Roth IRA.

talk to your fiduciary advisor

Need help navigating these changes? Contact us today to meet with your financial professional to determine how you may be impacted by this strategy.

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