Author Topic: Goodbye Backdoor Roth?  (Read 10819 times)

Zman

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Goodbye Backdoor Roth?
« on: November 18, 2016, 09:52:49 AM »
Does anybody have any news or thoughts on the status of the Backdoor Roth for 2017?  Trump doesnt like to pay taxes so maybe he will keep this open?

VoteCthulu

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Re: Goodbye Backdoor Roth?
« Reply #1 on: November 18, 2016, 10:01:14 AM »
The Backdoor Roth doesn't seem like it would be high on Trump's list even if we wanted to get rid of it (and I've seen no indication he does). Considering it mostly helps rich people and it could be considered a tax hike, I would be very surprised if it changed next year.

Zman

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Re: Goodbye Backdoor Roth?
« Reply #2 on: November 18, 2016, 10:38:38 AM »
But doesnt Obama have a 2017 budget plan in the works?

VoteCthulu

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Re: Goodbye Backdoor Roth?
« Reply #3 on: November 18, 2016, 11:07:43 AM »
It's just a proposal, they proposed the same thing in 2016 and it didn't happen.

spud1987

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Re: Goodbye Backdoor Roth?
« Reply #4 on: November 18, 2016, 01:17:21 PM »
There is bipartisan support to scrap the backdoor/mega backdoor roth strategy. This has been discussed elsewhere on the forum.

If it doesn't disappear in the year-end tax extender bill, there is almost no chance it survives tax reform, which is likely in 1H 2017.

Zman

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Re: Goodbye Backdoor Roth?
« Reply #5 on: November 18, 2016, 02:29:43 PM »
There is bipartisan support to scrap the backdoor/mega backdoor roth strategy. This has been discussed elsewhere on the forum.

If it doesn't disappear in the year-end tax extender bill, there is almost no chance it survives tax reform, which is likely in 1H 2017.

Could you please point me to where on the forum this is?   Sounds like we are saying goodbye :-(

spud1987

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Re: Goodbye Backdoor Roth?
« Reply #6 on: November 18, 2016, 04:29:44 PM »
There is bipartisan support to scrap the backdoor/mega backdoor roth strategy. This has been discussed elsewhere on the forum.

If it doesn't disappear in the year-end tax extender bill, there is almost no chance it survives tax reform, which is likely in 1H 2017.

Could you please point me to where on the forum this is?   Sounds like we are saying goodbye :-(

Sorry. Couldn't find it using search (which is terrible on this forum btw). But Sen. Wyden has a proposal eliminating the "loophole" that made it out of the Senate Finance Committee with bipartisan support. The tax press (there is such a thing for us tax lawyers, lol) has stated that it's possible it would be added on a tax extender bill that could pass in December.

Reido

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Re: Goodbye Backdoor Roth?
« Reply #7 on: November 19, 2016, 06:35:17 PM »
Can someone clarify exactly how they would change it?  Right now, as it stands, you can convert a traditional account to a Roth and get your cost basis as the deduction assuming you didn't write-off the initial contribution.  Would they take away the conversion option altogether?  Would they have income limits on the conversion? (this may be somewhat counter-productive since that would prevent people in higher brackets from converting and thus paying taxes). Would they double-tax the contribution?

Just curious to see if there are any ideas out there.

Metric Mouse

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Re: Goodbye Backdoor Roth?
« Reply #8 on: November 20, 2016, 05:34:25 AM »
There is bipartisan support to scrap the backdoor/mega backdoor roth strategy. This has been discussed elsewhere on the forum.

If it doesn't disappear in the year-end tax extender bill, there is almost no chance it survives tax reform, which is likely in 1H 2017.

Could you please point me to where on the forum this is?   Sounds like we are saying goodbye :-(

Sorry. Couldn't find it using search (which is terrible on this forum btw). But Sen. Wyden has a proposal eliminating the "loophole" that made it out of the Senate Finance Committee with bipartisan support. The tax press (there is such a thing for us tax lawyers, lol) has stated that it's possible it would be added on a tax extender bill that could pass in December.

This is kinda my understanding.  It is likely to be part of a larger set of tax reforms; Trump probably doesn't care about it personally, but enough of the people who will actually write the bills do, so it's likely to be tacked onto the suggested tax bracket changes and loophole alterations.

StreetCat

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Re: Goodbye Backdoor Roth?
« Reply #9 on: November 20, 2016, 06:14:59 AM »
Is the mega back door Roth (converting after tax 401k to Roth IRA) on the chopping block as well?

In my case the mega conversion is more beneficial than the plain back-door.

Monkey Uncle

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Re: Goodbye Backdoor Roth?
« Reply #10 on: November 20, 2016, 04:05:51 PM »
My understanding is that the Wyden bill would eliminate all tIRA to Roth conversions.  So no more Roth ladder, in addition to getting rid of the backdoor and mega-back door Roths.  That would suck a big one.  But would the repubs really support doing away with all conversions?

frugalecon

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Re: Goodbye Backdoor Roth?
« Reply #11 on: November 21, 2016, 07:26:07 AM »
The question I have is, if a bill did pass in December, would it retroactively apply to any conversions made in this tax year? Wouldn't seem sporting to pull the rug out from under people who made conversions based on tax law at the time.

My Roth is heavy in REITs, which have been hammered. I was actually getting close to the point of having to decide whether to recharacterize back to a TIRA and then reconvert in 2017. (I just did the conversion this year.) That seems a bit more risky at this point.

VoteCthulu

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Re: Goodbye Backdoor Roth?
« Reply #12 on: November 21, 2016, 02:34:45 PM »
Yes, Wyden's draft essentially nuked the Roth IRA, but it's unlikely to matter with the Republicans in control.

No, tax law changes take effect the next year at the earliest. The rare exceptions are to fix big problems (like the AMT) or offer new incentives/rebates/bailouts.

CheapskateWife

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Re: Goodbye Backdoor Roth?
« Reply #13 on: November 21, 2016, 02:44:05 PM »
Lets say just for kicks and giggles that the Roth Conversion ladder does come off the table...those of us with ER plans can still access our funds using the 72(t) SEPP strategy or just pay the penalty.

http://www.madfientist.com/how-to-access-retirement-funds-early/

I found this analysis really helpful towards understanding that we have several strategies available and the proposed regulatory changes might change my outcomes slightly, there are still good solid options for accessing my retirement funds early.


VoteCthulu

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Re: Goodbye Backdoor Roth?
« Reply #14 on: November 21, 2016, 03:25:21 PM »
Sure, the only difference for someone with 100% tIRA is a loss of flexibility. But for someone who needs to access all of their tIRA before age 60 it would mean a few extra years of work.

If you run the numbers for someone retiring at age 40 with 50% tIRA, 25% Roth contribution, and 25% Roth earnings you should see what I mean.

seattlecyclone

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Re: Goodbye Backdoor Roth?
« Reply #15 on: November 21, 2016, 03:41:00 PM »
I remember reading on Wyden's website that he was proposing to ban all Roth conversions. This is different from what President Obama has proposed in his budget the past few years. That proposal would prevent people from converting after-tax amounts from traditional retirement accounts (ending the backdoor Roth), while allowing pre-tax amounts to still be converted (which would leave the Roth ladder in place).

Obama's plan would be a net positive for the federal budget. The assumption is that people would start contributing to taxable accounts instead of backdoor Roths, which would cause dividend and capital gain tax collections to increase bit by bit every year as that money compounds.

Wyden's proposal would likely look like a net negative under the budget metrics they use. Many (most?) Roth conversions are of pre-tax amounts, which means the government gets their tax money now instead of far in the future when the account owner finally withdraws it. They tend to only look at the impact of a proposal over ten years, so it seems like ending all Roth conversions would be more of an uphill battle than ending only the backdoor Roth conversions.

That said, I have no idea what to expect from the upcoming all-Republican government.

But even if we consider that Wyden's proposal would be adopted in its entirety, it wouldn't be the end of the world for prospective early retirees. I have heard of no serious proposal to prevent early withdrawals entirely, or to increase the 10% early withdrawal tax. So in the absolute worst case, for someone whose entire stash is in traditional retirement accounts, and who plans to spend it all down during the timeframe where the 10% early withdrawal tax would apply, banning Roth conversions would mean your traditional retirement accounts are worth 10% less than they once were. Instead of saving 25x to meet the 4% rule, you'll need to get to 27.5x. That's assuming you'll just make early withdrawals and pay the extra tax. Use SEPP or save some money in Roth or taxable accounts or plan to spend some of that money past age 60, and the damage is less.

Honestly, the loss of Obamacare makes me rethink the feasibility of FIRE much more than any tax plan that I've seen proposed.

Zman

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Re: Goodbye Backdoor Roth?
« Reply #16 on: January 03, 2017, 03:38:59 PM »
Is there any news on this? Did it get tacked on or not? Seems like motley fool is saying we can backdoor in 2017 : http://www.fool.com/retirement/2016/12/31/roth-ira-contribution-limits-in-2017-and-how-to-wo.aspx

seattlecyclone

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Re: Goodbye Backdoor Roth?
« Reply #17 on: January 04, 2017, 12:03:27 AM »
I've heard of nothing of this sort passing Congress so far. The Republicans have stated their intent to push a large tax reform bill through this year. I wouldn't be surprised if the backdoor Roth loophole is eliminated there, either by banning after-tax conversions, by eliminating the income limit for front door contributions, or a more wide-ranging overhaul of the whole tax-advantaged savings account landscape. Anything is possible.

Paul der Krake

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Re: Goodbye Backdoor Roth?
« Reply #18 on: January 04, 2017, 12:12:38 AM »
Side hustle idea: a newsletter or a blog with an RSS feed that keeps everyone in the FIRE community informed of changes to our beloved tax-efficient vehicles.

Zman

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Re: Goodbye Backdoor Roth?
« Reply #19 on: January 13, 2017, 05:42:11 PM »

Indexer

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Re: Goodbye Backdoor Roth?
« Reply #20 on: January 13, 2017, 07:00:30 PM »
Just informational: The history of the backdoor Roth.

There use to be income limits on Roth conversions. If you made too much money to contribute you couldn't convert either.

In the aftermath of 2008 the government wanted more tax revenue so they removed the income limit knowing many people would convert from Trad to Roth. This would bring in tax revenue in the short term at the expense of the future.

In 2009 many CPAs realized this meant you could contribute to a Trad, not take a deduction, and then convert... the backdoor Roth. Once people figured it out the news spread fast in the investment/tax industries. Any financial advisor or accountant should have known about the backdoor roth 'before' it became law. Congress HAD to know the implications of the law prior to passing it.

Recently, I want to say 2014, the IRS made what I can only call an oopsie moment. There was confusion for years whether you could convert the after tax money in a 401k to a Roth. Most employer plans and most investment firms leaned towards 'no' but there was no official answer. Then the IRS came out and said sure, you can do that. Now there are companies who have set up their 401ks specifically so people can contribute the full 53k and then convert.


Personally, I think Roth backdoors are stupid, but for the opposite reason you think. If we are trying to encourage people to save WHY do we have ALL of these complex rules about contributing to an account with a 5500 max? A rule designed to prevent a billionair from contributing 5500 to an IRA ends up creating all of these headaches for average americans. If there wasn't an income limit we wouldn't have a backdoor which means no one would have thought of the mega backdoor roth(in the 401k) which means there wouldn't be this big negative blowback now. The contribution limit is $5500. Let whoever wants to contribute to contribute and let's dedicate our time to something more important.

BTDretire

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Re: Goodbye Backdoor Roth?
« Reply #21 on: January 15, 2017, 08:01:56 AM »
http://www.finance.senate.gov/imo/media/doc/MODA%20Leg%20Text%20(FRA16044).pdf
 Is this the wrong bill proposal?
I see nothing about a Roth.

jjandjab

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Re: Goodbye Backdoor Roth?
« Reply #22 on: January 15, 2017, 08:39:10 AM »
Let whoever wants to contribute to contribute and let's dedicate our time to something more important.

Yes to this (feel like I've been following Indexer around today with lots of agreement)!

Like reforming the tax code, I think there should just be a single, all encompassing retirement plan - a single limit involving 401k/403/457/SEP/SIMPLE, etc... Just say anyone can contribute earned income up to 60k per year (or some other number - figured that was close to the 53k + 5500 most can max out) and you can choose to either be taxed now (Roth) or later (traditional) and be done with it. If your employer wants to still have a match, great. It would encourage savings and be straightforward. And those who work somewhere without a retirement plan could still benefit from higher limits than just an IRA.

I am what many on this board would consider well-off and my current NW is more than the FI numbers of folks here. But I like my job and it pays well and I want to build a nest egg. But it isn't so high that I don;t go through all the byzantine actions to get the backdoor Roth and game the system. The truly rich I am sure don't bother.

So get rid of the backdoor Roth, fine, but I hope they encourage retirement savings in general by making it easier. Which I doubt will happen.

Indexer

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Re: Goodbye Backdoor Roth?
« Reply #23 on: January 15, 2017, 07:59:05 PM »
Let whoever wants to contribute to contribute and let's dedicate our time to something more important.

Yes to this (feel like I've been following Indexer around today with lots of agreement)!

Like reforming the tax code, I think there should just be a single, all encompassing retirement plan - a single limit involving 401k/403/457/SEP/SIMPLE, etc... Just say anyone can contribute earned income up to 60k per year (or some other number - figured that was close to the 53k + 5500 most can max out) and you can choose to either be taxed now (Roth) or later (traditional) and be done with it. If your employer wants to still have a match, great. It would encourage savings and be straightforward. And those who work somewhere without a retirement plan could still benefit from higher limits than just an IRA.

I am what many on this board would consider well-off and my current NW is more than the FI numbers of folks here. But I like my job and it pays well and I want to build a nest egg. But it isn't so high that I don;t go through all the byzantine actions to get the backdoor Roth and game the system. The truly rich I am sure don't bother.

So get rid of the backdoor Roth, fine, but I hope they encourage retirement savings in general by making it easier. Which I doubt will happen.

Thank you!

Well now I can return the favor. I completely agree around having 1 type of retirement plan and let employers and employees contribute to it. It doesn't have to be this complicated.

Zman

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Re: Goodbye Backdoor Roth?
« Reply #24 on: February 01, 2017, 07:43:02 PM »
still nothing??????????

seattlecyclone

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Re: Goodbye Backdoor Roth?
« Reply #25 on: February 01, 2017, 08:49:18 PM »
Not that I've heard of. The federal government is going crazy these days and hasn't gotten around to reforming the tax code yet.

Paul der Krake

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Re: Goodbye Backdoor Roth?
« Reply #26 on: February 01, 2017, 08:59:01 PM »
There were serious talks of immigration reform all the way back in 2012.

I will be astounded if anything meaningful is done to something as complicated as the tax code before the mid-terms, or even the end of this administration's term.

Monkey Uncle

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Re: Goodbye Backdoor Roth?
« Reply #27 on: February 02, 2017, 04:35:53 AM »
Yeah, the Rebumblekins can't even get off the dime on their number one priority (repealing/replacing/repairing the ACA, or whatever the hell the word of the moment is).

Metric Mouse

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Re: Goodbye Backdoor Roth?
« Reply #28 on: February 02, 2017, 07:58:27 PM »
Yeah, the Rebumblekins can't even get off the dime on their number one priority (repealing/replacing/repairing the ACA, or whatever the hell the word of the moment is).
Hey now, give them some credit. They are probably working very hard on it. I mean, they're doing a pretty terrible job, but they do seem to be working so very hard, poor things.

WildJager

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Re: Goodbye Backdoor Roth?
« Reply #29 on: February 03, 2017, 09:32:30 AM »
There is bipartisan support to scrap the backdoor/mega backdoor roth strategy. This has been discussed elsewhere on the forum.

If it doesn't disappear in the year-end tax extender bill, there is almost no chance it survives tax reform, which is likely in 1H 2017.

Could you please point me to where on the forum this is?   Sounds like we are saying goodbye :-(

Copy and paste this into google.

site: forum.mrmoneymustache.com backdoor roth