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Here today, gone tomorrow? The backdoor Roth IRA takes center stage.



There’s been a lot of talk lately about the backdoor Roth IRA. In particular, its potential elimination if the new federal spending bill is signed into law. But before we go any further, it’s important to clarify that the backdoor Roth IRA isn’t actually an account type, but a strategy used by many Americans to circumvent the income limits placed on Roth IRA accounts. The Roth IRA One of the biggest benefits of the Roth IRA is the provision for qualified tax-free withdrawals. Even though taxes are paid upfront, the earnings are tax-free. However, there are income limitations that prevent high income earners from directly contributing to a Roth IRA. For the 2021 tax year, the income limit for single filers is $140,000, while the limit for married couples is $208,000. The Traditional IRA If you’re unable to make contributions to the Roth IRA because of income limitations, the Traditional IRA is an alternative option. The Traditional IRA is a retirement account that allows for pretax contributions (individuals generally can subtract contributions from their income and reduce the taxes they pay), with taxes paid on future withdrawals. However, there are income tax deduction limitations, depending on your participation in an employer sponsored retirement plan, and your modified adjusted gross income. Backdoor Roth IRA If your high income prevents you from both being able to deduct contributions made to a Traditional IRA and from directly contributing to a Roth IRA, the backdoor Roth IRA strategy may appeal to you. To make a backdoor Roth contribution as a high income earner, you would make the initial contribution to a Traditional IRA account, then convert those contributions to a Roth IRA account. In retirement, all withdrawals would be tax and penalty-free as long as the following conditions are met:

  1. It’s been at least 5 years since your first contributions to the Roth IRA; and

  2. You are 59½ or older.


Is The Party Ending?

As a way to potentially close the loophole on the backdoor Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000. If approved, this new provision would take effect January 1, 2032.


With so many potential tax changes looming, Finwell can guide you through the intricacies of the proposals, and their potential impact on your big picture finances.


Thinking About A Backdoor Roth IRA?

Email us at Wealth@finwellbenefits.com or click below to schedule a free consultation to learn more about our investment philosophy and the investment options available to you.




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