Changes May Be Coming to the ‘Back Door’ Roth IRA

Writer: Steve Dinnen

Congress could soon close the door on the “back door” Roth IRA. Legislation to this effect already has passed the House of Representatives, by way of the Build Back Better bill. Its fate now hinges on what the Senate decides.

Roth IRAs are a great way to accumulate wealth for retirement, since earnings are tax free. The knock on Roth IRAs, however, is that they aren’t available to high-income earners. You are locked out of a contribution if your 2021 Modified Adjusted Gross Income exceeds $140,000 for a single filer, or $208,000 for married filing jointly. (Roth IRAs have another shortfall in that they cap contributions at a puny $6,000, or $7,000 over age 50).

The back door Roth is an end run around this income cap. You simply open a traditional IRA, using non-deductible money, and then convert it to a Roth (paying any applicable taxes, one time). The House is onto this gambit, though, and proposes to end it. We’ll know soon enough whether the Senate concurs.

Also up for debate is a House-proposed clampdown on conversions of the workplace Roth 401(k). It’s an even sweeter deal than the individual Roth conversion because it doesn’t have income caps and allows for much higher contributions. Some of these clampdown features start next year; others, not until 2032 (yes, you’re reading that right – 10 years from now).

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