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Roth While You Can

James McGlynn, 3:02 am ET

NEWS OF ENTREPRENEUR Peter Thiel’s $5 billion Roth account, which was funded with PayPal stock, has motivated Congress to look at restricting the growth and size of Roth accounts.

There’s talk of limiting Roth account balances to $5 million or $10 million. There are also proposals to limit both backdoor IRA conversions and so-called mega-backdoor conversions. The latter involves funding a nondeductible 401(k) and then immediately converting the money to a Roth. There’s even discussion of not allowing high-income workers to convert traditional IRAs to Roth accounts.

In recent years, Congress has nixed Social Security’s file-and-suspend option and compelled beneficiaries to empty inherited IRAs within 10 years, rather than over their lifetime. But both changes were grandfathered, meaning those already using the file-and-suspend strategy and those who already had inherited IRAs weren’t affected. Presumably, it would be a similar situation with existing Roth accounts. The upshot: If Congress limits the ability to take advantage of Roth accounts in future, it makes even more sense to convert to a Roth today, while the door is still open.

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Carl Book
Carl Book
8 months ago

I’m amazed at how much interest this issue is getting. There must be a lot of us sitting with IRA’s and trying to figure out what to do. It is so hard to be willing to pay tax on a conversion to a Roth, but the siren call of a tax free Roth is singing to us.

corrupt
corrupt
8 months ago

I read today that the bill indicates any post tax $$$, or $$ transferred or contributed after 12/31/21 will not be eligible for transfer… hoping this means I can still convert my IRA (transferred from a 401K a few years ago).

James McGlynn CFA RICP®
James McGlynn CFA RICP®
8 months ago
Reply to  corrupt

The major loophole is the backdoor conversion that doesn’t pay a tax to convert. If you will be paying a tax to convert to a Roth you will “probably” be allowed.

An
An
8 months ago

The reason you don’t pay tax for the conversion step of a backdoor Roth is because you paid the tax on the first step – non-deductible traditional IRA contribution. Why do you think paying double taxes is an okay thing?

Jonathan Clements
Admin
Jonathan Clements
8 months ago
Reply to  An

The politicians aren’t looking to double-tax contributions to Roths (at least not currently!). Rather, the concern is that the law, as written today, has resulted in an unintended consequence — folks, who would otherwise be ineligible, contributing to Roth IRAs and Roth 401(k)s using the backdoor method. There is a reason they call it “backdoor”….

Douglas Haavik
Douglas Haavik
9 months ago

Thank you to commenters Perry, Clements and Oromode. All are informative and helpful.

Ben Rodriguez
Ben Rodriguez
9 months ago

Boooooo!!

John Yeigh
John Yeigh
9 months ago

The other strong incentive to Roth convert now, while we can, is the upcoming 2026 expiration of the 2017 tax rate cuts. In additon, the sooner one converts assets to a Roth, the longer time runway for tax-free compounding.

Douglas Haavik
Douglas Haavik
9 months ago

My understanding: For inherited Roth IRAs, the beneficiaries are compelled to empty the accont on a fully taxable as ordinary income basis within 10 years. If I was to pass on tomorrow my 40ish daughter would inherit and this would force a doubling of their family income for the next ten years, probably in their peak earning years. This seems like a dirty trick to play on the next generation, and for that reason I am considering gifting the entire Roth IRA to her, NOW. I would appreciate any comments on this reasoning. BTW, our assets have increased considerably in the last few years, so running out of retirement income is nearly impossible.

William Perry
William Perry
9 months ago
Reply to  Douglas Haavik

I recommend reading the IRS commentary on this subject which can be found at https://www.irs.gov/publications /p590b#en_US_2020_publink100035553. As is often the case in taxes the details and exceptions are key to making an informed decision. I would also note that while any type of IRA can be inherited you can not simply directly gift them during your life. Also, the new 10 year rule for required distributions requires the account to be emptied by December 31 of the 10th year following death. Great topic.

Jonathan Clements
Admin
Jonathan Clements
9 months ago
Reply to  Douglas Haavik

You’ve been misled: Withdrawals from Roth accounts are not taxable to beneficiaries, though they do indeed need to empty the accounts within 10 years.

Ormode
Ormode
9 months ago

However, Roth balances over $11.5 million would be subject to estate tax, along with the rest of the estate. I believe there are some estate/income tax offset rules for taxable IRAs over $11.5 million, but I’ve never had to fill out that particular form.

R Quinn
R Quinn
9 months ago

Isn’t it interesting how a single example can trigger major changes just because one or two politicians see it as a cause. AMT was the result of something similar as was the estate tax.

James McGlynn CFA RICP®
James McGlynn CFA RICP®
9 months ago
Reply to  R Quinn

Yes. When they stopped the File and Suspend they blamed the Maximization software providers for taking advantage.

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