We continue to get questions about whether it’s wise to do a Backdoor Roth IRA or Mega Backdoor Roth IRA at this point, given the unsettled state of the Build Back Better (BBB) legislation in Congress.
As background, the Backdoor Roth IRA strategy allows you to make an indirect Roth IRA contribution if your income is too high to qualify for a direct contribution. (The income phase-out ranges for 2022 are $204,000 – $214,000 for married couples filing jointly and $129,000 – $144,000 for single filers). You simply make a traditional IRA contribution and then convert it to a Roth IRA. (No income limits apply for making traditional IRA contributions, but you must have taxable compensation or earned income.)
You can use the Mega Backdoor Roth by making after-tax contributions to your 401(k) or 403(b) and then converting those to a Roth IRA. Many plans do not allow after-tax contributions. But for those that do, the Mega Backdoor potentially allows for much higher conversion amounts than the $6,000 or $7,000 that can be converted each year through the Backdoor Roth.
BBB would have eliminated both strategies (as well as in-plan conversions of after-tax contributions to Roth plan contributions) effective January 1, 2022. However, although passed by the House last November 19, BBB stalled in the Senate and has not been brought to a vote.
Using either of these strategies now would be risky if Congress bans them retroactively back to January 1, 2022. Could that happen?
Yes, it theoretically could. But several things would have to occur. First, both houses of Congress would have to pass a scaled-back version of BBB. That doesn’t seem likely at this point, but things could change. Second, the new version would have to include the prohibition of the Backdoor and Mega Backdoor. Again, there’s no way of knowing whether that would happen (although the elimination of those strategies in the original legislation did not seem very controversial). Finally, the ban would have to be retroactive. This would be politically unpopular, and hopefully, Congress would understand the unfairness of making people “reverse” conversions done at a time when they were perfectly legal. (The converted amount would be considered an excess Roth IRA contribution).
Optimistically, any new legislation eliminating the Backdoor and Mega Backdoor wouldn’t be effective until January 1, 2023, at the earliest. But Congress has surprised us before. So, the most conservative advice at this point would be to wait and see what happens later in the year before pulling the trigger on a Backdoor or Mega Backdoor Roth. We will let you know if there are any new developments.
By Ian Berger, JD
IRA Analyst
