President Biden’s $1.75 trillion Build Back Better bill, which has been struggling to gain congressional approval, has been amended to retain a lucrative retirement account loophole that was initially planned to be eliminated.
Democrat members of the House Ways and Means Committee decided in October to leave intact the so-called backdoor Roth IRA loophole to Biden’s Build Back Better bill, which once had a price tag of $3.5 trillion before being slashed in half as a way to secure enough votes for the bill’s passage.
Working with a financial advisor to maximize your retirement assets’ value, whether traditional IRAs or Roth IRAs, is crucial. What Is a Backdoor Roth IRA?
In 2010, backdoor Roth IRAs came into effect, allowing individuals to work around income restrictions by converting traditional IRAs into Roth IRAs. Direct Roth IRA contributions are limited for people with modified adjusted gross income over certain levels. Roth IRAs, where retirement savings grow tax-free, are not available to individuals making more than $144,000 in the tax year 2022.
Workers who earn more than this threshold may convert their pre-tax contributions into Roth IRAs. After paying income taxes on their initial contributions and gains, their retirement savings grow tax-free, eliminating Required Minimum Distributions (RMDs).
The Ongoing Loophole
To help pay for Biden’s $3.5 trillion Build Back Better bill, House Democrats proposed eliminating backdoor Roth IRAs earlier this year. In response to concerns about the bill’s high cost, moderate Democrats and Republican lawmakers trimmed it down to $1.75 trillion in a new draft.
This proposal included an elimination of the backdoor Roth IRA strategy. The bill would have prevented Roth conversions for IRAs and employer-sponsored plans for single taxpayers and married taxpayers filing separately (MFS) with taxable income over $400,000, married taxpayers filing jointly (MFJ) with taxable income over $450,000, and heads of household (HoH) with taxable income over $425,000. Backdoor Roth IRAs were set to be eliminated post-Dec. 31, 2021.
What That Means for Retirement Planners
Taking advantage of the now-11-year-old loophole is no longer a pressing matter for many taxpayers planning retirement. Besides continuing to use that loophole, taxpayers should note other things in the latest version of Build Back Better, which is also being worked on by the House Rules Committee. One measure would extend the enhanced Affordable Care Act tax credits that would save individuals and families thousands of dollars each year on healthcare premiums and assist people in states without Medicaid coverage.
Additionally, the revised bill does not mandate any further contributions to an individual’s traditional or Roth IRA if the total value of their IRAs and defined contribution retirement accounts at the end of the previous taxable year exceeds $10 million.
Bottom Line
There appears to be no danger in this popular loophole favored by high-income earners. Despite the changes, clean energy measures remain included, Medicare is expanded, and universal prekindergarten is introduced. There is a possibility that the house will make further revisions to the Build Back Better bill as key Democratic holdouts have yet to endorse it publicly.