What if Democrats end the Roth IRA backdoor strategy

House Speaker Nancy Pelosi and House Ways and Means Committee Chairman Richard Neal, D-Mass., Discuss the United States-Mexico-Canada agreement on Capitol Hill on December 10, 2019.

Saul Loeb | AFP | Getty Images

A few popular retirement savings techniques may soon disappear as Democrats grapple with how to pay for their multibillion-dollar spending program.

Advisors are already exploring solutions for their clients.

Currently, investors with a modified adjusted gross income for 2021 greater than $ 140,000 ($ 208,000 for couples filing jointly) cannot contribute to a Roth individual retirement account.

But the wealthiest investors can get around the limits with a so-called backdoor maneuver by making what are known as non-deductible contributions to their traditional IRA, then quickly converting the money into their Roth IRA.

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The Roth “mega-backdoor” strategy can be even more powerful, allowing someone to convert more funds with after-tax 401 (k) contributions.

House Democrats, however, want to crack down on both, regardless of income level, after Dec.31, according to a summary released by the House Ways and Means Committee.

Pre-tax conversions – using funds that someone has not paid direct debits on – are still permitted in the proposed legislation. But those with taxable income greater than $ 400,000 ($ 450,000 for married couples filing together) could not use the strategy in a little over ten years after December 31, 2031.

As debate intensifies in Congress, financial advisers are still waiting for the final details.

In the meantime, here are some possible solutions that they are evaluating with customers.

“We still recommend the contributions of the Roth IRA backdoor and the Roth 401 (k) mega backdoor for 2021,” said certified financial planner Brian Schmehil, director of wealth management at The Mather Group in Chicago.

Someone considering these steps should start weighing the pros and cons with a financial advisor before the year-end deadline.

Although the Democrats’ proposal applies to conversions after 2021, employees may still have the option to transfer after-tax 401 (k) contributions to a Roth IRA when they retire and renew their funds, Schmehil said.

People are always going to look for ways to make their money grow tax free.

Ashton laurent

Financial Advisor at Goldfinch Wealth Management

“It appears the proposal would not impact the current ability to take your 401 (k) after-tax contributions and transfer them to a Roth IRA when you separate from service,” he said.

Additionally, more employers can add Roth 401 (k) options to corporate plans, which all investors (regardless of income) can always use, Schmehil said.

Health savings accounts

If Democrats end the Roth IRA backdoor and mega-backdoor strategies, eligible investors can prioritize contributions to the health savings account.

“People are always going to be looking for ways to grow their money tax free,” said Ashton Lawrence, CFP at Goldfinch Wealth Management in Greenville, South Carolina.

Investors with eligible high-deductible health insurance can amortize 2021 contributions up to $ 3,600 for individual plans or $ 7,200 for family plans. They can grow the money tax-free and withdraw the funds without penalty at any time for qualifying medical expenses.

However, many people don’t realize that they can use the money “basically for anything” once they’re 65, Lawrence said.

“Once you have assets in there, there is also no minimum distribution required, like a traditional IRA either,” he added.

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