The Money Mustache Community

Learning, Sharing, and Teaching => Investor Alley => Topic started by: Rufus.T.Firefly on January 11, 2016, 10:28:49 AM

Title: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: Rufus.T.Firefly on January 11, 2016, 10:28:49 AM
http://blogs.wsj.com/experts/2016/01/11/you-can-still-do-a-backdoor-roth-ira-conversion-for-now/

I did not realize there was legislative pressure to remove this oft-hailed method of investment planning on this forum. Any thoughts about tax diversification and hedging against legislative changes? Even if the current attempts have failed, we can't be sure the "Backdoor" option will be around in 10 years.

I'm curious to hear what others are doing to plan for this possibility.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: dandarc on January 11, 2016, 10:31:50 AM
Simple answer -

If the backdoor Roth is outlawed, and  your income is over the Roth contribution limit, invest in a taxable account.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: Tjat on January 11, 2016, 10:33:49 AM
I don't think there is anything to do to "prepare." If it's available as an option now, I plan to utilize it. If it goes away in 10 years, I will stop doing it.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: seattlecyclone on January 11, 2016, 10:43:23 AM
Simple answer -

If the backdoor Roth is outlawed, and  your income is over the Roth contribution limit, invest in a taxable account.

Agreed. It's a glaring loophole. I'm surprised it has survived this long. They should either get rid of the income limit or outlaw conversions of non-deductible amounts. If the latter plan happens, I'll just keep more money in a taxable account. Not a huge deal.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: spud1987 on January 11, 2016, 11:34:02 AM
I would assume that a crackdown would include limiting the conversion from after-tax 401k contributions into roth accounts. I was able to contribute about 20k into a roth last year using this method (my agi is around 170k). This is a glaring loophole and I would understand if it was closed.

Then again, eliminating the loophole would not raise any money currently since the Roth loophole only "robs" the government upon withdrawal. I suspect that this is why Congress has not been keen to limit the loophole since they only seem concerned about closing loopholes as "pay fors" for federal spending.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: dandarc on January 11, 2016, 11:46:05 AM
Maybe someday we get a package deal - close the MegaBackdoor, but remove the income limit for regular contributions?
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: seattlecyclone on January 11, 2016, 01:21:12 PM
I would assume that a crackdown would include limiting the conversion from after-tax 401k contributions into roth accounts. I was able to contribute about 20k into a roth last year using this method (my agi is around 170k). This is a glaring loophole and I would understand if it was closed.

Then again, eliminating the loophole would not raise any money currently since the Roth loophole only "robs" the government upon withdrawal. I suspect that this is why Congress has not been keen to limit the loophole since they only seem concerned about closing loopholes as "pay fors" for federal spending.

Congress does budget forecasts 10 years out. President Obama's original proposal would have eliminated the ability to convert post-tax funds to Roth. As you state, it would raise no extra money in year 1. However the change would bring in a little bit more money each year as that money that could have been put in Roth accounts is instead put into taxable accounts and the owners need to pay taxes on the growth of that money. Even on a 10-year time scale it's still a pretty minuscule change in the federal budget though, less than $400 million total over ten years.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: spud1987 on January 12, 2016, 12:55:31 PM
I would assume that a crackdown would include limiting the conversion from after-tax 401k contributions into roth accounts. I was able to contribute about 20k into a roth last year using this method (my agi is around 170k). This is a glaring loophole and I would understand if it was closed.

Then again, eliminating the loophole would not raise any money currently since the Roth loophole only "robs" the government upon withdrawal. I suspect that this is why Congress has not been keen to limit the loophole since they only seem concerned about closing loopholes as "pay fors" for federal spending.

Congress does budget forecasts 10 years out. President Obama's original proposal would have eliminated the ability to convert post-tax funds to Roth. As you state, it would raise no extra money in year 1. However the change would bring in a little bit more money each year as that money that could have been put in Roth accounts is instead put into taxable accounts and the owners need to pay taxes on the growth of that money. Even on a 10-year time scale it's still a pretty minuscule change in the federal budget though, less than $400 million total over ten years.

I agree that over time it will cost the government to keep the loophole. One of the reasons why Congress' 10-year forecasts aren't optimal. Similar games are played with pension funding (ie temporarily reducing the amount companies are required to put into pension plans currently, thus reducing the companies tax deduction at the expense of future increased tax deductions when the funding will be due).

But I still wouldn't have to pay taxes on the growth of the contributions even if the loophole was closed since I could rollover my after-tax account into a regular IRA if the loophole didn't exist. However, I would then be required to pay ordinary income rates upon withdrawal.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: dandarc on January 12, 2016, 01:36:34 PM
I would assume that a crackdown would include limiting the conversion from after-tax 401k contributions into roth accounts. I was able to contribute about 20k into a roth last year using this method (my agi is around 170k). This is a glaring loophole and I would understand if it was closed.

Then again, eliminating the loophole would not raise any money currently since the Roth loophole only "robs" the government upon withdrawal. I suspect that this is why Congress has not been keen to limit the loophole since they only seem concerned about closing loopholes as "pay fors" for federal spending.

Congress does budget forecasts 10 years out. President Obama's original proposal would have eliminated the ability to convert post-tax funds to Roth. As you state, it would raise no extra money in year 1. However the change would bring in a little bit more money each year as that money that could have been put in Roth accounts is instead put into taxable accounts and the owners need to pay taxes on the growth of that money. Even on a 10-year time scale it's still a pretty minuscule change in the federal budget though, less than $400 million total over ten years.

I agree that over time it will cost the government to keep the loophole. One of the reasons why Congress' 10-year forecasts aren't optimal. Similar games are played with pension funding (ie temporarily reducing the amount companies are required to put into pension plans currently, thus reducing the companies tax deduction at the expense of future increased tax deductions when the funding will be due).

But I still wouldn't have to pay taxes on the growth of the contributions even if the loophole was closed since I could rollover my after-tax account into a regular IRA if the loophole didn't exist. However, I would then be required to pay ordinary income rates upon withdrawal.
And you'd better have good records, or you'll pay income tax on not only the earnings but the after-tax contributions themselves.  Granted, you should have good records regardless, but after-tax contributions is an area where you could easily pay income tax twice if you don't.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: bearkat on January 15, 2016, 07:04:13 AM
Depending on how they closed the backdoor Roth IRA loophole, wouldn't that screw with the Roth IRA conversion ladder? That seems like a bigger concern to me than just an extra $5.5k / yr of tax advantaged savings.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: PathtoFIRE on January 15, 2016, 09:23:51 AM
Yeah, they could totally shut off conversions or limit them in a way similar to pre-2010 (I think), but the proposals that the White House issued this time last year basically called for eliminating the ability to convert any money that isn't "taxable" into Roth. So "pre-tax" IRA/401k money is taxable on conversion and therefore allowed; after-tax "non-deductible" tIRA money could not be converted, which is the backdoor Roth.
Title: Re: You Can Still Do a Backdoor Roth IRA Conversion -- for Now
Post by: brooklynguy on January 15, 2016, 11:28:58 AM
but the proposals that the White House issued this time last year basically called for eliminating the ability to convert any money that isn't "taxable" into Roth. So "pre-tax" IRA/401k money is taxable on conversion and therefore allowed; after-tax "non-deductible" tIRA money could not be converted, which is the backdoor Roth.

...which is consistent with what you'd expect, since it's in the government's interest to keep the tax-revenue-generating ability to do IRA conversions intact (and which is why the potential for that ability to be shut off or limited should not be high on anyone's list of things to worry about).