Author Topic: Wyden proposal to end all Roth Conversions  (Read 3701 times)

MustacheAndaHalf

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Wyden proposal to end all Roth Conversions
« on: November 03, 2016, 02:04:40 AM »
A Senator in the finance committee, Ron Wyden, has made a proposal that includes ending all Roth conversions.  If the proposal becomes law, that would eliminate any plan to contribute to Traditional and convert to Roth in a lower bracket (including the Roth conversion ladder).
http://www.wsj.com/articles/sen-ron-wyden-to-propose-new-curbs-on-roth-iras-1473285186

I get how this is more fair, in that only people who can contribute to a Roth would get to benefit.  But the bill supposedly targets people who hold $5M+ in their Roth accounts, and there it misses the mark.  I'm surprised it wouldn't allow Roth conversions under a certain income limit, but instead would ban all Roth conversions.

jeffnhl

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Re: Wyden proposal to end all Roth Conversions
« Reply #1 on: November 03, 2016, 06:32:45 AM »
(edit - ignore this reply - I was able to find the senate write-up that does propose removing all conversions:

http://www.finance.senate.gov/imo/media/doc/RISE%20Act%20JCT%20technical%20explanation.pdf
)



Had to read other links on the proposal since the wsj was behind a paywall...  If there is more there please let me know.  Wasn't this proposed as part of the 2017 Budget proposal from President Obama back in Feb?

https://www.kitces.com/blog/treasury-greenbook-fy2017-presidents-budget-proposals-target-crackdown-retirement-and-estate-planning-loopholes/

(which was a repeat from 2016?)

https://www.kitces.com/blog/proposals-for-eliminating-stretch-iras-repealing-nua-and-the-3-4m-retirement-account-cap-in-the-fy2016-treasury-greenbook/

Isn't the proposed change to the megabackdoorRoth conversion just going back to the 2010 rule? (Which only restricts "any new Roth conversions of after-tax dollars after the effective date of the new legislation.") 

Which means Pretax conversions would all still be a-okay?

The first line of your post is a bit confusing to me where you say "proposal that includes ending all Roth conversions" isn't it just the after tax backdoor conversions which is much less common?



« Last Edit: November 03, 2016, 11:18:51 AM by jeffnhl »


jeffnhl

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Re: Wyden proposal to end all Roth Conversions
« Reply #3 on: November 03, 2016, 09:23:31 AM »
Thanks for the past links.  I found a good summary on the Senate site - there is a link where you can send feedback on the proposal - which I did in addition to sending to my 2 senators.

Retirement_Savings@finance.senate.gov

http://www.finance.senate.gov/imo/media/doc/RISE%20Act%20discussion%20draft%20one%20pager.pdf

http://www.finance.senate.gov/ranking-members-news/wyden-proposal-would-crack-down-on-tax-avoidance-in-retirement-plans-create-new-opportunities-for-working-americans-to-save
 
I figure a discussion board in good but not sure if the US Senate frequents here often  ;-)




MustacheAndaHalf

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Re: Wyden proposal to end all Roth Conversions
« Reply #4 on: November 03, 2016, 11:27:18 AM »
terran - I didn't search those forums.  Some people interested in the Roth ladder might not review the tax forum that often, so maybe the discussion will differ here.

jeffnhl - Hm, pay wall is good point.  Here's Google's cached link of the "one page summary" of the RISE act proposed by Senator Wyden:
http://webcache.googleusercontent.com/search?q=cache:SFIltvSXq7gJ:www.finance.senate.gov/ranking-members-news/wyden-proposal-would-crack-down-on-tax-avoidance-in-retirement-plans-create-new-opportunities-for-working-americans-to-save&num=1&hl=en&gl=us&strip=1&vwsrc=0

To quote the highlight:
In addition to cracking down on “mega Roth IRAs,” the draft proposal would:

* Allow employers to make “matching” contributions to a 401(k) retirement plan while their employees make student loan repayments. Under this proposal, recent graduates who cannot afford to save money above their student loan repayments would no longer have to forego the employer match.

* Make the “Saver’s Credit” refundable so that it is available to Americans with no income tax liability, simplify its structure, require that the credit amount be contributed directly to a tax-favored retirement plan and increase its income cap.

* Eliminate Roth conversions for both IRAs and employer-sponsored plans to prevent tax gaming and close the “back door” around income limits.

* Eliminate “stretch IRAs” to prevent taxpayer-subsidized retirement accounts from being used as estate planning tax loopholes.

* Gradually increase the age at which retirement plan participants are required to begin taking distributions from their accounts. The “required minimum distribution” age of 70.5 years has remained unchanged since the early 1960s. In addition, the draft provides that participants who reach the required age with balances in their retirement plans of less than $150,000 will not be required to begin taking distributions.


Note the "eliminate Roth conversions" clause covers all conversions.  So the RISE act aims at million dollar Roth accounts, but it's wording targets all Roth conversions.

MustacheAndaHalf

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Re: Wyden proposal to end all Roth Conversions
« Reply #5 on: November 03, 2016, 11:38:19 AM »
My own take - I wish the "no Roth conversions" rule only applied to incomes above $250,000.  Then it would fit into the approach taken with the net investment income tax.  As it stands, retirees who plan on a Roth ladder might be unpleasantly surprised.  I think there's enough retirees with assets to make this a dangerous piece of legislation to stand behind.

I also view it as targeting two groups, but only giving a rationalization for one of the targets.  Why target everyone's Roth conversions when the only thing studied was people with over $5,000,000 in their Roth IRAs?  It's a small number of people, and a very odd situation.  Most people who do Roth conversions do not meet the criteria mentioned in this proposed legislation.  Seems wrong to target everyone for the sins of a few - especially if those few are already being prevented from doing the same thing again.

As to post-FIRE planning, it may shake up who wants to use Traditional vs Roth.  If you plan to convert from Traditional to Roth during low tax years, that could go away.  It might mean contribute to a Roth IRA while you can.

jeffnhl

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Re: Wyden proposal to end all Roth Conversions
« Reply #6 on: November 04, 2016, 09:16:44 AM »

[thread snip - jeffnhl]

jeffnhl - Hm, pay wall is good point.  Here's Google's cached link of the "one page summary" of the RISE act proposed by Senator Wyden:
http://webcache.googleusercontent.com/search?q=cache:SFIltvSXq7gJ:www.finance.senate.gov/ranking-members-news/wyden-proposal-would-crack-down-on-tax-avoidance-in-retirement-plans-create-new-opportunities-for-working-americans-to-save&num=1&hl=en&gl=us&strip=1&vwsrc=0

[thread snip - jeffnhl]

Note the "eliminate Roth conversions" clause covers all conversions.  So the RISE act aims at million dollar Roth accounts, but it's wording targets all Roth conversions.

I see the same thing now, thanks - Prompted me to immediately write my Senators as well as provide feedback to the 'public comment' email for the proposal offered by the Senate committee.  I would think applying the same income test for Roth to conversions would keep the integrity and intent of the Roth IRA.

Frankly, it seems to me like they are burning the house down to close the backdoor.

MDM

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Re: Wyden proposal to end all Roth Conversions
« Reply #7 on: November 04, 2016, 08:20:39 PM »
From the WSJ article: "While Mr. Wyden’s proposal stands little chance of becoming law in the final months of this year, it points to the kinds of policies he would pursue as Finance Committee chairman if Democrats retake the Senate."

If true, then if the Republicans retain the Senate this won't happen.  If the Democrats take the Senate, it's likely Clinton will also be elected, so this and other items might happen.