The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Greenstache on September 13, 2021, 10:12:12 AM
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Many interesting elements in the tax revision outline released by the Ways & Means Committee this morning.
One provision will remove the ability to make Roth conversions for single taxpayers with taxable income (TI) over $400k, and for MFJ the TI limit will be $450k.
Possibly of more consequence to this community is this provision: "Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021."
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
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Damn, that's going to kill the megabackdoor too.
In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth
conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers
married filing separately) with taxable income over $400,000, married taxpayers filing jointly
with taxable income over $450,000, and heads of households with taxable income over $425,000
(all indexed for inflation). This provision applies to distributions, transfers, and contributions
made in taxable years beginning after December 31, 2031.
Furthermore, this section prohibits all employee after-tax contributions in qualified plans and
prohibits after-tax IRA contributions from being converted to Roth regardless of income level,
effective for distributions, transfers, and contributions made after December 31, 2021.
Where did you see this linked @Greenstache ?
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For sure.
I got the document from an EY release this morning. I'll attach the PDF here.
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is this a loophole that needs to be closed? how big of a tax deal is this for the government?
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Weird. I can't really see that linked anywhere off their website other than the pdf.
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The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
This is the bigger proposal that affects everyone here. It could kill the Roth ladder
They're also forcing rich people to take withdrawals. So they're proposal eliminates a tax savvy way for lower networth individuals together their money early while forcing higher incomes to take it. How about we just get rid of the age for withdrawals.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
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Let's be honest though, "backdoor Roth IRA" sounds way more sketchy than "1031 exchange."
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
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The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
This is the bigger proposal that affects everyone here. It could kill the Roth ladder
How so? It would eliminate the mega option; converting a 401k with regular pre-tax funds still works.
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The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
This is the bigger proposal that affects everyone here. It could kill the Roth ladder
How so? It would eliminate the mega option; converting a 401k with regular pre-tax funds still works.
I don't know how that sentence I posted is unclear.
It will end Roth conversions from IRA and 401k accounts. The Roth ladder is based on Roth conversions from IRA accounts.
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The policy would apply at the same income thresholds listed above. It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.
Apparently there is an income threshold and it doesn't apply the first 10 years. Going to be piles for this community to unpack over the next month or so as this plan is finalized
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Anyone have further insight on this section?
I own shares in a privately-held US bank, some non-retirement but some in a Traditional IRA and then some in a 401k (ESOP). Just curious whats going to happen to the IRA shares.
Sec. 138312. Prohibition of IRA Investments Conditioned on Account Holder’s Status.
The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA
owner to have certain minimum level of assets or income, or have completed a minimum level of
education or obtained a specific license or credential. For example, the legislation prohibits IRAs
from holding investments which are offered to accredited investors because those
investments are securities that have not been registered under federal securities laws. IRAs
holding such investments would lose their IRA status. This section generally takes effect for tax
years beginning after December 31, 2021, but there is a 2-year transition period for IRAs already
holding these investments.
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The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
This is the bigger proposal that affects everyone here. It could kill the Roth ladder
How so? It would eliminate the mega option; converting a 401k with regular pre-tax funds still works.
I don't know how that sentence I posted is unclear.
It will end Roth conversions from IRA and 401k accounts. The Roth ladder is based on Roth conversions from IRA accounts.
It doesn't say it would end ALL Roth conversions, only ones using after-tax IRA contributions. So it sounds like pre-tax IRA contributions could still be allowed to be converted over.
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The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
This is the bigger proposal that affects everyone here. It could kill the Roth ladder
How so? It would eliminate the mega option; converting a 401k with regular pre-tax funds still works.
I don't know how that sentence I posted is unclear.
It will end Roth conversions from IRA and 401k accounts. The Roth ladder is based on Roth conversions from IRA accounts.
It doesn't say it would end ALL Roth conversions, only ones using after-tax IRA contributions. So it sounds like pre-tax IRA contributions could still be allowed to be converted over.
Hopefully. The govt should want those since it gets them revenue today vs tomorrow
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Roth isn't all that meaningful for most FIRE'ed folks either given the short timeline.
Sure, it's advantageous, but the main reason Roth benefits an early retiree has to do with Roth conversion pipeline.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
It looks like I may stay in government instead of jumping to the private sector until this goes through or is shot down. 457(b) plans are still amazing.
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It doesn't say it would end ALL Roth conversions, only ones using after-tax IRA contributions. So it sounds like pre-tax IRA contributions could still be allowed to be converted over.
I hunted down this thread after reading a summary of these changes at this CNBC article: https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html
Per that article, this legislation would kill BOTH the backdoor Roth AND the mega backdoor Roth in one fell swoop. Incredible - I feared the long term risk of one of these being killed, but for both to be killed and this soon is depressing as someone striving for FIRE. I've barely even had time to take advantage of them.
A few questions I have are:
- Is this truly tied at the hip with the $3.5 trillion spending legislation? If so, the odds that it gets killed or neutered might be significant.
- If anyone comes across information about the level of support (or lack of) for these anti-Roth legislation elements, I'd welcome it.
- Does this imply the mega backdoor would be killed immediately if this passed, or is it also subject to that Dec 2031 deadline listed? It appears that killing the regular backdoor roth would occur at 2031 but it seems ambiguous as to when the mega backdoor would be killed.
I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation.
You can probably thank ProPropaganda (err ProPublica) for this. I suspect this is more collateral damage about to hit the average Joe thanks to their envy-filled, scorched earth witch hunt of the uber rich.
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Does this imply the mega backdoor would be killed immediately if this passed, or is it also subject to that Dec 2031 deadline listed? It appears that killing the regular backdoor roth would occur at 2031 but it seems ambiguous as to when the mega backdoor would be killed.
Mega backdoor dies on 12/31/21, per page 11 of the text as it stands now.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
You'd still be able to convert pre-tax balances as long as your income is less than $400k (single)/$450k (married). Wouldn't affect Roth pipeline plans for most of us, I imagine. The 2032 effective date for this section is interesting, almost certainly a result of Congress's system of only considering the budgetary effect over the next ten years. Reducing Roth conversions will result in a short-term revenue drop, so scheduling the change a decade out would take that effect out of the "cost" for the bill.
After-tax conversions will be banned at all income levels. I'm curious how this meshes with the existing pro-rata rules. Would you be prohibited from converting your traditional IRA altogether if it has any after-tax basis in it? The summary is silent on this point, we'd have to see the full text to know. If anyone finds a link to that, please post it here!
Is this truly tied at the hip with the $3.5 trillion spending legislation? If so, the odds that it gets killed or neutered might be significant.
My understanding is this will be part of the big bill to be passed using the reconciliation process, yes.
Does this imply the mega backdoor would be killed immediately if this passed, or is it also subject to that Dec 2031 deadline listed? It appears that killing the regular backdoor roth would occur at 2031 but it seems ambiguous as to when the mega backdoor would be killed.
The backdoor conversion ban would take effect in 2022 for all income levels. Rules around conversions of pre-tax amounts would stay as they are for the next decade, and only in 2032 would there be an income cap put on them.
You can probably thank ProPropaganda (err ProPublica) for this. I suspect this is more collateral damage about to hit the average Joe thanks to their envy-filled, scorched earth witch hunt of the uber rich.
Yes, the impetus for a lot of this does seem to be that ProPublica article. The impact on the "average Joe" seems very minimal. Most of it doesn't affect people with incomes under $400k. The only thing that does apply below that level is the backdoor Roth ban, which few people with below-average incomes are taking advantage of at the moment. The mega backdoor was always obviously a huge loophole, only a matter of time before they closed it.
The RMDs for large account balances are rather significant. If you have over $10 million in your retirement accounts (IRAs and workplace plans combined) at the end of the year, you'll need to withdraw half the excess during the next year. In addition if you have over $20 million combined, and you have anything in Roth accounts, you'll need to pull out 100% of the excess over $20 million until your Roth account is empty. All these rules only apply to those with incomes over $400k/$450k. Peter Thiel in particular is going to have a pretty big incentive to do whatever it takes to keep his AGI below that level until he turns 59½ (he will turn 54 next month). His multi-billion Roth IRA is essentially all gains, which counts as taxable income if withdrawn early. He could be looking at paying over half of his Roth balance in taxes if he can't get his income below the line for a few years.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
Nothing in that article suggested that the Roth conversion ladder would go away for regular folks. Individuals with income over 140k would not be able to make Roth conversions, but that doesn't seem to apply to most FIRE folks.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
Nothing in that article suggested that the Roth conversion ladder would go away for regular folks. Individuals with income over 140k would not be able to make Roth conversions, but that doesn't seem to apply to most FIRE folks.
The Roth conversion threshold would be $400k-$450k, depending on filing status. The $140k number is the existing income limit for Roth contributions.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
Our Roth accounts are bigger than our taxable accounts. That amounts to a lot of taxes saved during accumulation.
We also always expected the mega backdoor to be a target. It is a huge barn door and the horses are restless....
As for the average Joe, you need to have an above average income to have need of the backdoor. Average Joe has direct access to Roth IRA contributions.
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PTF. Was JUST going to work on getting on the mega-backdoor train in 2022. :facepalm:
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For sure.
I got the document from an EY release this morning. I'll attach the PDF here.
Thanks @Greenstache for the document. So much interesting information in there to dig in.
I started mega backdoor Roth this year and converted extra 6 grand to Roth. It worked out very well. Encouraged, I began this elaborate strategy to maximize mega back door Roth contributions during my work years starting this month.
Oh well. I guess I am too late to the party.
Well, we still have at least 4 months to take advantage.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
Nothing in that article suggested that the Roth conversion ladder would go away for regular folks. Individuals with income over 140k would not be able to make Roth conversions, but that doesn't seem to apply to most FIRE folks.
The Roth conversion threshold would be $400k-$450k, depending on filing status. The $140k number is the existing income limit for Roth contributions.
Ok, I was reading the paragraph above it about how prior to 2010 the conversion and contribution thresholds were the same.
Why would someone with that much income want to do a Roth conversion, outside of the mega backdoor strategy already described?
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Story of my life -- I finally have debts paid, emergency fund saved, and enough income to do mega backdoor (along with a plan that has it) and it's going to be closed.
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Why would someone with that much income want to do a Roth conversion, outside of the mega backdoor strategy already described?
Same reason the rest of us do: because they think they might pay a lower rate today than in the future. The top tax bracket doesn't start until $628k for married couples, giving a range between $450k and $628k where you could conceivably save a bit of future tax if you expect to have that really high income level continue into retirement. If you're one of the people with $10 million in your IRA you could be looking at RMDs approaching that top tax bracket by the time you hit 80, plus whatever other income you might have.
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I was really surprised to see this - never heard this floated as an idea in any of the many Big 4 webcasts and articles about what might make it into the legislation. Meanwhile, nothing about ending or capping 1031 real estate exchanges is in the text, which was mentioned often leading up to this. Hard to tell if this will pass, but it feels like there isn't much of a backdoor Roth lobby, while there are many lobbyists working hard on things like making sure 1031 exchanges survive.
The backdoor Roth is pretty insignificant in the grand scheme for fire. What is significant is if conversions completely go away with only 10% penalty or sepp 72t left to access it.
You'd still be able to convert pre-tax balances as long as your income is less than $400k (single)/$450k (married). Wouldn't affect Roth pipeline plans for most of us, I imagine. The 2032 effective date for this section is interesting, almost certainly a result of Congress's system of only considering the budgetary effect over the next ten years. Reducing Roth conversions will result in a short-term revenue drop, so scheduling the change a decade out would take that effect out of the "cost" for the bill.
After-tax conversions will be banned at all income levels. I'm curious how this meshes with the existing pro-rata rules. Would you be prohibited from converting your traditional IRA altogether if it has any after-tax basis in it? The summary is silent on this point, we'd have to see the full text to know. If anyone finds a link to that, please post it here!
Is this truly tied at the hip with the $3.5 trillion spending legislation? If so, the odds that it gets killed or neutered might be significant.
My understanding is this will be part of the big bill to be passed using the reconciliation process, yes.
Does this imply the mega backdoor would be killed immediately if this passed, or is it also subject to that Dec 2031 deadline listed? It appears that killing the regular backdoor roth would occur at 2031 but it seems ambiguous as to when the mega backdoor would be killed.
The backdoor conversion ban would take effect in 2022 for all income levels. Rules around conversions of pre-tax amounts would stay as they are for the next decade, and only in 2032 would there be an income cap put on them.
You can probably thank ProPropaganda (err ProPublica) for this. I suspect this is more collateral damage about to hit the average Joe thanks to their envy-filled, scorched earth witch hunt of the uber rich.
Yes, the impetus for a lot of this does seem to be that ProPublica article. The impact on the "average Joe" seems very minimal. Most of it doesn't affect people with incomes under $400k. The only thing that does apply below that level is the backdoor Roth ban, which few people with below-average incomes are taking advantage of at the moment. The mega backdoor was always obviously a huge loophole, only a matter of time before they closed it.
The RMDs for large account balances are rather significant. If you have over $10 million in your retirement accounts (IRAs and workplace plans combined) at the end of the year, you'll need to withdraw half the excess during the next year. In addition if you have over $20 million combined, and you have anything in Roth accounts, you'll need to pull out 100% of the excess over $20 million until your Roth account is empty. All these rules only apply to those with incomes over $400k/$450k. Peter Thiel in particular is going to have a pretty big incentive to do whatever it takes to keep his AGI below that level until he turns 59½ (he will turn 54 next month). His multi-billion Roth IRA is essentially all gains, which counts as taxable income if withdrawn early. He could be looking at paying over half of his Roth balance in taxes if he can't get his income below the line for a few years.
Hmm, looks like Peter’s foresight to get New Zealand citizenship just might have been the smart thing to do.
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As far as I know Thiel is still a US citizen. Even if he weren't I'd be very surprised to find that foreign citizens with US retirement accounts are exempt from RMDs and any taxation that may arise from those.
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Found this online https://premieroffshore.com/what-happens-to-your-ira-when-you-give-up-us-citizenship-expatriate/
This is why the ultra rich get dual citizenships, so if a country starts coming after your money you can (to the best of your legal ability) get out of said country with as much of your fortune intact as possible as quickly as possible.
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PTF. I'm not really going to bother worrying about any of this until the legislation gets further along. They're just in the drafting stages, and I think there's going to have to be some serious negotiations if it ends up passing through both houses of Congress.
All my Congressional representatives will be voting against the $3.5T bill anyways.
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I'm looking forward to the article coming on kitces.com today, one of the writers had a long twitter thread last night on it. I'm not surprised a strategy called "backdoor" stays around.
The prohibition on private placements inside IRAs will hurt those of us who use real estate syndications as an investment in our tax deferred accounts.
Shocked the 1031 still survives and not much in there targeting carried interest (20 to 25% increase in capital gains). This seems like a tax the wealthy but not the really wealthy type of legislation. Not sure they get anywhere close to the $3.5tril in revenue increases though.
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Realistically can this even be voted on and enacted for the 2022 tax year?
I'd imagine this has major impact for the various financial institutions which means they'd have only a few months to update all their systems, if this passed today.
That feels unlikely, especially since there's a HUGE number of items just in that proposal doc that the committee put; the Roth IRA/401k ones are a small part of them.
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Realistically can this even be voted on and enacted for the 2022 tax year?
I'd imagine this has major impact for the various financial institutions which means they'd have only a few months to update all their systems, if this passed today.
That feels unlikely, especially since there's a HUGE number of items just in that proposal doc that the committee put; the Roth IRA/401k ones are a small part of them.
trumps tax cuts and jobs act was passed in december days before the end of the year. Had to make a last minute contribution to a DAF to take advantage of a higher tax bracket as well as other minor changes. you can enact any tax changes any time even retroactively effective. The govt doesnt care about the amount of time or stress it puts on people or companies.
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Realistically can this even be voted on and enacted for the 2022 tax year?
I'd imagine this has major impact for the various financial institutions which means they'd have only a few months to update all their systems, if this passed today.
That feels unlikely, especially since there's a HUGE number of items just in that proposal doc that the committee put; the Roth IRA/401k ones are a small part of them.
trumps tax cuts and jobs act was passed in december days before the end of the year. Had to make a last minute contribution to a DAF to take advantage of a higher tax bracket as well as other minor changes. you can enact any tax changes any time even retroactively effective. The govt doesnt care about the amount of time or stress it puts on people or companies.
Not commenting on the relative quality of the bills, but in terms of legislative timing, the ARP Act was passed in March of this year and had several tax related changes that were applicable to the 2020 tax year.
I would say generally that the government has not made "adverse" tax law changes in retroactive fashion in my memory. But even though the ARPA changes were "beneficial", the timing of their passage meant that generally you couldn't do any tax planning to take advantage of them because the tax year had already closed.
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Realistically can this even be voted on and enacted for the 2022 tax year?
I'd imagine this has major impact for the various financial institutions which means they'd have only a few months to update all their systems, if this passed today.
That feels unlikely, especially since there's a HUGE number of items just in that proposal doc that the committee put; the Roth IRA/401k ones are a small part of them.
trumps tax cuts and jobs act was passed in december days before the end of the year. Had to make a last minute contribution to a DAF to take advantage of a higher tax bracket as well as other minor changes. you can enact any tax changes any time even retroactively effective. The govt doesnt care about the amount of time or stress it puts on people or companies.
Not commenting on the relative quality of the bills, but in terms of legislative timing, the ARP Act was passed in March of this year and had several tax related changes that were applicable to the 2020 tax year.
I would say generally that the government has not made "adverse" tax law changes in retroactive fashion in my memory. But even though the ARPA changes were "beneficial", the timing of their passage meant that generally you couldn't do any tax planning to take advantage of them because the tax year had already closed.
some of this current proposed bill is active as of yesterday if its not changed in the coming weeks. not necessarily retroactive but its adverse to the people it affects and they won't know if its true til the bill is finalized.
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Some doors open, some doors close. The grind never stops.
(https://64.media.tumblr.com/1e139a5f1d85bbb1485916cbf0c1f6fd/tumblr_inline_mh6w3x4UQX1qz6f4b.gif)
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Toddler pressed button post. Woops
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I found the actual text (https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf) of the proposal.
Details about the retirement changes I found interesting:
* The prohibition on contributing more once you hit $10 million in retirement accounts wouldn't apply to SEP or SIMPLE IRAs. It would apply to other employer contributions, which implies that employers that typically make these contributions will need to have some way of knowing which of their employees are above the limit.
* The $10 million limit would apply to retirement plans under 401(a), 403(a), and 403(b), plus IRAs and governmental 457 plans. Non-governmental 457 plan balances are excluded from this calculation.
* Any employer who has a retirement plan participant with more than a $2.5 million balance will have to report information about those participants and their plan balances to the IRS.
* The $400k-$450k "adjusted taxable income" used for determining who gets caught up in these rules is defined as taxable income plus any deduction for IRA contributions that brings the total above $10 million, minus any income from the new RMDs for people with high retirement account balances.
* The new RMD for people with high retirement account balances will be exempt from the 10% early withdrawal tax. No exemption from the taxation of Roth growth if withdrawn early, as far as I can tell.
* Employer plans will need to allow in-service distributions from employees who certify that they need to take out the money to satisfy their high-balance RMDs.
* For the changes to close the backdoor Roth, I didn't see anything in there that would modify the pro-rata rule for IRA distributions, meaning that people with any after-tax basis in a traditional IRA may be prohibited from doing any Roth conversions. Not super confident on this point though.
* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
* The statute of limitations for enforcing IRA violations would increase to six years.
Some other interesting bits unrelated to the retirement account stuff:
* The temporary suspension of the itemized deduction for casualty losses, that began in 2018, would be repealed. This would include allowing losses to be deducted retroactively for the years where this deduction was suspended.
* There would be a new tax credit for 30% of the amount of money people spend on wildfire mitigation/prevention measures.
* The tax credits for low-income housing would be increased, and there would be a new credit for housing development/renovation costs in certain lower-income neighborhoods when the homes are sold to lower-income individuals.
* Certain tax credits for renewable energy and alternative fuels would be extended and expanded.
* New tax credit for 15% of the cost of an electric bicycle (phases out at AGI above $150k married/$112.5k HoH/$75k single).
* The new higher monthly child tax credit payments would be extended through 2025. After that the child tax credit amounts would revert to what they were before, except the credit would be fully refundable.
* The increases to the child/dependent care tax credit and dependent care FSAs would continue indefinitely instead of sunsetting at the end of this year.
* There would be a new tax credit against employer payroll taxes, subsidizing certain child care employee wages.
* There would be a new tax credit against employer payroll taxes, subsidizing certain local journalist wages.
* There would be a new tax credit of up to $4,000 for people who pay for in-home caregivers for adults that need long-term care.
* Certain temporary changes to the earned income credit for 2021 (including higher amounts for childless individuals, no upper age limit, ability to use prior year's earned income if higher) would be extended indefinitely.
* The new ACA applicable percentages, currently scheduled to sunset after 2022, would be extended indefinitely. No more cliff at 400% of the poverty level.
* Some changes to allow ACA marketplace coverage for people with low incomes. Looks like a workaround to the fact that many states haven't expanded Medicaid and therefore have a bunch of folks ineligible for Medicaid or ACA subsidies.
* New federal scholarships for certain medical students who promise to practice in an underserved area after they graduate.
* New 40% tax credit for donations toward certain research projects at public universities, to be claimed in lieu of a charitable itemized deduction.
* People with prior drug convictions would no longer be disqualified from receiving the American Opportunity education credit.
* The 39.6% bracket would be reinstated for taxable incomes over $450k (married), $425k (HoH), $400k (single), $225k (married filing separately), effective 2022. This replaces all of the current 37% bracket and part of the 35% bracket.
* A new 3% additional tax on MAGI over $5 million, effective 2022.
* The capital gains rate would go up to 25% for the same income thresholds as the 39.6% regular income bracket, effective yesterday.
* The estate tax exemption would go back down to $5 million (in 2010 dollars), effective 2022.
* The amount of property exempt from estate tax if it's used for a family business will increase from $750k (in 1997 dollars) to $11.7 million (in 2020 dollars). Seems like a new strategy in estate planning: park at least half of your net worth in an operating business (or businesses), with at least 25% of your net worth into real property used by the business (or businesses), hire a family member to run it or otherwise "materially participate" for at least five of the eight years before you die, and no estate tax on the first $11.7 million of the business value!
* Almost $79 billion appropriated to pay for additional IRS tax enforcement over the next decade.
* A new $2,000 credit for assistive technology purchased for a blind taxpayer, or blind member of the taxpayer's family.
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Hallelujah on the ACA cliff becoming a gentle decline permanently. Cliffs in income taxes are bad, and this is a pretty big one.
And that is the right thing to do regarding the ACA donut hole. Aggravating that federal legislation is required today because expanding Medicaid solves that problem and has been available for quite a while now, and done in such a way that it benefits pretty much everyone - lower cost to state, expansion states have seen lower premiums on the exchange, obviously it directly benefits folks newly eligible for medicaid. And still the powers that be in some places just won't do it.
Knocking on all the wood that those two provisions make it into the final bill.
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* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
This one is most concerning for me. I dont think you can sell shares from your IRA to yourself. Or will you have to pay taxes on the balance to get it out of an IRA?
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* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
This one is most concerning for me. I dont think you can sell shares from your IRA to yourself. Or will you have to pay taxes on the balance to get it out of an IRA?
Paying taxes to get it out of the IRA is the whole point - these changes are aimed at raising revenue.
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* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
This one is most concerning for me. I dont think you can sell shares from your IRA to yourself. Or will you have to pay taxes on the balance to get it out of an IRA?
Paying taxes to get it out of the IRA is the whole point - these changes are aimed at raising revenue.
Correct this is meant to prevent the mega wealthy from the games they play with companies and making mega Roth's
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@seattlecyclone thanks for the break down. I have a work place ESOP at a privately held company that's a qualified retirement plan. We're an s Corp esop. Does this 10mil limit apply to funds in that account added to funds in our 401k?
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* Almost $79 billion appropriated to pay for additional IRS tax enforcement over the next decade.
My favorite part of this appropriation is the bit stating "except that no use of these funds is intended to increase taxes on any taxpayer with taxable income below $400,000." It makes me laugh that it is "not intended to" but not prohibited from doing so - just a nice bit of fanciful verbiage to throw into the bill. And since this follows the proposed huge increases on tobacco, nicotine, and vaping products, it certainly WILL increase taxes for many users of those products who make far less than $400k.
I also think the above-the-line $250 union dues deduction (clearly a carrot for union loyalty) is rather silly. But, such is tax policy.
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@seattlecyclone thanks for the break down. I have a work place ESOP at a privately held company that's a qualified retirement plan. We're an s Corp esop. Does this 10mil limit apply to funds in that account added to funds in our 401k?
I believe so. There's actually a special section about how to handle ESOP retirement plans. Quoted below:
(iii) SPECIAL RULES FOR EMPLOYEE STOCK OWNERSHIP PLANS.—If any payee to which this subsection applies for any taxable year has account balances in 1 or more employee stock ownership plans (as defined in section 4975(e)(7)) any portion of which is invested in employer securities which are not readily tradable on an securities market, the increase in minimum required distributions by reason of this subsection shall be allocated—
(I) first to all account balances (other than such portions) of the payee in all applicable retirement plans in the manner provided by this subparagraph (without regard to this clause), and
(II) then to such portions in such manner as the taxpayer chooses.
The Secretary shall prescribe regulations which provide that if any such increase is allocated to any such portion of an account balance for the first taxable year of the payee beginning in 2022, the payee may elect to have such portion distributed over a period of years not greater than the period specified by the Secretary in such regulations (and any distributions made in accordance with such election shall be treated for purposes of this section as made in such first taxable year).
What I think it's saying is that if you're over $10 million and you have some non-publicly-traded stock in one or more ESOP accounts, you're supposed to take your special high-balance RMD first from any other retirement accounts you have. If you empty those out and still need to take out some high-balance RMD from your ESOP(s) in 2022, the IRS is supposed to make some regulations for how you can do that over a period of a few years instead of all at once, and it will still count toward the 2022 RMD. In 2023 and later, I guess you'll need to figure out how to liquidate it all at once.
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* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
This one is most concerning for me. I dont think you can sell shares from your IRA to yourself. Or will you have to pay taxes on the balance to get it out of an IRA?
Paying taxes to get it out of the IRA is the whole point - these changes are aimed at raising revenue.
The accredited investor thing is predicted to raise an average of $170 million per year over the next decade (https://www.jct.gov/publications/2021/jcx-42-21/). The prohibition on owning shares of closely-held businesses is predicted to raise only about $4.2 million per year. Neither of these things is hugely impactful where the federal budget is concerned, the latter item especially. The slight increase to the top bracket is expected to raise about 100 times as much as both of these IRA changes combined. I'd guess they were more intended to remedy perceived unfair advantages enjoyed by Thiel et al.
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I found the actual text (https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf) of the proposal.
Details about the retirement changes I found interesting:
* The prohibition on contributing more once you hit $10 million in retirement accounts wouldn't apply to SEP or SIMPLE IRAs. It would apply to other employer contributions, which implies that employers that typically make these contributions will need to have some way of knowing which of their employees are above the limit.
* The $10 million limit would apply to retirement plans under 401(a), 403(a), and 403(b), plus IRAs and governmental 457 plans. Non-governmental 457 plan balances are excluded from this calculation.
* Any employer who has a retirement plan participant with more than a $2.5 million balance will have to report information about those participants and their plan balances to the IRS.
* The $400k-$450k "adjusted taxable income" used for determining who gets caught up in these rules is defined as taxable income plus any deduction for IRA contributions that brings the total above $10 million, minus any income from the new RMDs for people with high retirement account balances.
* The new RMD for people with high retirement account balances will be exempt from the 10% early withdrawal tax. No exemption from the taxation of Roth growth if withdrawn early, as far as I can tell.
* Employer plans will need to allow in-service distributions from employees who certify that they need to take out the money to satisfy their high-balance RMDs.
* For the changes to close the backdoor Roth, I didn't see anything in there that would modify the pro-rata rule for IRA distributions, meaning that people with any after-tax basis in a traditional IRA may be prohibited from doing any Roth conversions. Not super confident on this point though.
* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
* The statute of limitations for enforcing IRA violations would increase to six years.
Some other interesting bits unrelated to the retirement account stuff:
* The temporary suspension of the itemized deduction for casualty losses, that began in 2018, would be repealed. This would include allowing losses to be deducted retroactively for the years where this deduction was suspended.
* There would be a new tax credit for 30% of the amount of money people spend on wildfire mitigation/prevention measures.
* The tax credits for low-income housing would be increased, and there would be a new credit for housing development/renovation costs in certain lower-income neighborhoods when the homes are sold to lower-income individuals.
* Certain tax credits for renewable energy and alternative fuels would be extended and expanded.
* New tax credit for 15% of the cost of an electric bicycle (phases out at AGI above $150k married/$112.5k HoH/$75k single).
* The new higher monthly child tax credit payments would be extended through 2025. After that the child tax credit amounts would revert to what they were before, except the credit would be fully refundable.
* The increases to the child/dependent care tax credit and dependent care FSAs would continue indefinitely instead of sunsetting at the end of this year.
* There would be a new tax credit against employer payroll taxes, subsidizing certain child care employee wages.
* There would be a new tax credit against employer payroll taxes, subsidizing certain local journalist wages.
* There would be a new tax credit of up to $4,000 for people who pay for in-home caregivers for adults that need long-term care.
* Certain temporary changes to the earned income credit for 2021 (including higher amounts for childless individuals, no upper age limit, ability to use prior year's earned income if higher) would be extended indefinitely.
* The new ACA applicable percentages, currently scheduled to sunset after 2022, would be extended indefinitely. No more cliff at 400% of the poverty level.
* Some changes to allow ACA marketplace coverage for people with low incomes. Looks like a workaround to the fact that many states haven't expanded Medicaid and therefore have a bunch of folks ineligible for Medicaid or ACA subsidies.
* New federal scholarships for certain medical students who promise to practice in an underserved area after they graduate.
* New 40% tax credit for donations toward certain research projects at public universities, to be claimed in lieu of a charitable itemized deduction.
* People with prior drug convictions would no longer be disqualified from receiving the American Opportunity education credit.
* The 39.6% bracket would be reinstated for taxable incomes over $450k (married), $425k (HoH), $400k (single), $225k (married filing separately), effective 2022. This replaces all of the current 37% bracket and part of the 35% bracket.
* A new 3% additional tax on MAGI over $5 million, effective 2022.
* The capital gains rate would go up to 25% for the same income thresholds as the 39.6% regular income bracket, effective yesterday.
* The estate tax exemption would go back down to $5 million (in 2010 dollars), effective 2022.
* The amount of property exempt from estate tax if it's used for a family business will increase from $750k (in 1997 dollars) to $11.7 million (in 2020 dollars). Seems like a new strategy in estate planning: park at least half of your net worth in an operating business (or businesses), with at least 25% of your net worth into real property used by the business (or businesses), hire a family member to run it or otherwise "materially participate" for at least five of the eight years before you die, and no estate tax on the first $11.7 million of the business value!
* Almost $79 billion appropriated to pay for additional IRS tax enforcement over the next decade.
* A new $2,000 credit for assistive technology purchased for a blind taxpayer, or blind member of the taxpayer's family.
Good lord, the social engineering that goes on with the tax code.
Sent from my iPhone using Tapatalk
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I found the actual text (https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf) of the proposal.
Details about the retirement changes I found interesting:
* The prohibition on contributing more once you hit $10 million in retirement accounts wouldn't apply to SEP or SIMPLE IRAs. It would apply to other employer contributions, which implies that employers that typically make these contributions will need to have some way of knowing which of their employees are above the limit.
* The $10 million limit would apply to retirement plans under 401(a), 403(a), and 403(b), plus IRAs and governmental 457 plans. Non-governmental 457 plan balances are excluded from this calculation.
* Any employer who has a retirement plan participant with more than a $2.5 million balance will have to report information about those participants and their plan balances to the IRS.
* The $400k-$450k "adjusted taxable income" used for determining who gets caught up in these rules is defined as taxable income plus any deduction for IRA contributions that brings the total above $10 million, minus any income from the new RMDs for people with high retirement account balances.
* The new RMD for people with high retirement account balances will be exempt from the 10% early withdrawal tax. No exemption from the taxation of Roth growth if withdrawn early, as far as I can tell.
* Employer plans will need to allow in-service distributions from employees who certify that they need to take out the money to satisfy their high-balance RMDs.
* For the changes to close the backdoor Roth, I didn't see anything in there that would modify the pro-rata rule for IRA distributions, meaning that people with any after-tax basis in a traditional IRA may be prohibited from doing any Roth conversions. Not super confident on this point though.
* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
* The statute of limitations for enforcing IRA violations would increase to six years.
Some other interesting bits unrelated to the retirement account stuff:
* The temporary suspension of the itemized deduction for casualty losses, that began in 2018, would be repealed. This would include allowing losses to be deducted retroactively for the years where this deduction was suspended.
* There would be a new tax credit for 30% of the amount of money people spend on wildfire mitigation/prevention measures.
* The tax credits for low-income housing would be increased, and there would be a new credit for housing development/renovation costs in certain lower-income neighborhoods when the homes are sold to lower-income individuals.
* Certain tax credits for renewable energy and alternative fuels would be extended and expanded.
* New tax credit for 15% of the cost of an electric bicycle (phases out at AGI above $150k married/$112.5k HoH/$75k single).
* The new higher monthly child tax credit payments would be extended through 2025. After that the child tax credit amounts would revert to what they were before, except the credit would be fully refundable.
* The increases to the child/dependent care tax credit and dependent care FSAs would continue indefinitely instead of sunsetting at the end of this year.
* There would be a new tax credit against employer payroll taxes, subsidizing certain child care employee wages.
* There would be a new tax credit against employer payroll taxes, subsidizing certain local journalist wages.
* There would be a new tax credit of up to $4,000 for people who pay for in-home caregivers for adults that need long-term care.
* Certain temporary changes to the earned income credit for 2021 (including higher amounts for childless individuals, no upper age limit, ability to use prior year's earned income if higher) would be extended indefinitely.
* The new ACA applicable percentages, currently scheduled to sunset after 2022, would be extended indefinitely. No more cliff at 400% of the poverty level.
* Some changes to allow ACA marketplace coverage for people with low incomes. Looks like a workaround to the fact that many states haven't expanded Medicaid and therefore have a bunch of folks ineligible for Medicaid or ACA subsidies.
* New federal scholarships for certain medical students who promise to practice in an underserved area after they graduate.
* New 40% tax credit for donations toward certain research projects at public universities, to be claimed in lieu of a charitable itemized deduction.
* People with prior drug convictions would no longer be disqualified from receiving the American Opportunity education credit.
* The 39.6% bracket would be reinstated for taxable incomes over $450k (married), $425k (HoH), $400k (single), $225k (married filing separately), effective 2022. This replaces all of the current 37% bracket and part of the 35% bracket.
* A new 3% additional tax on MAGI over $5 million, effective 2022.
* The capital gains rate would go up to 25% for the same income thresholds as the 39.6% regular income bracket, effective yesterday.
* The estate tax exemption would go back down to $5 million (in 2010 dollars), effective 2022.
* The amount of property exempt from estate tax if it's used for a family business will increase from $750k (in 1997 dollars) to $11.7 million (in 2020 dollars). Seems like a new strategy in estate planning: park at least half of your net worth in an operating business (or businesses), with at least 25% of your net worth into real property used by the business (or businesses), hire a family member to run it or otherwise "materially participate" for at least five of the eight years before you die, and no estate tax on the first $11.7 million of the business value!
* Almost $79 billion appropriated to pay for additional IRS tax enforcement over the next decade.
* A new $2,000 credit for assistive technology purchased for a blind taxpayer, or blind member of the taxpayer's family.
Good lord, the social engineering that goes on with the tax code.
Sent from my iPhone using Tapatalk
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@seattlecyclone thanks for the break down. I have a work place ESOP at a privately held company that's a qualified retirement plan. We're an s Corp esop. Does this 10mil limit apply to funds in that account added to funds in our 401k?
I believe so. There's actually a special section about how to handle ESOP retirement plans. Quoted below:
(iii) SPECIAL RULES FOR EMPLOYEE STOCK OWNERSHIP PLANS.—If any payee to which this subsection applies for any taxable year has account balances in 1 or more employee stock ownership plans (as defined in section 4975(e)(7)) any portion of which is invested in employer securities which are not readily tradable on an securities market, the increase in minimum required distributions by reason of this subsection shall be allocated—
(I) first to all account balances (other than such portions) of the payee in all applicable retirement plans in the manner provided by this subparagraph (without regard to this clause), and
(II) then to such portions in such manner as the taxpayer chooses.
The Secretary shall prescribe regulations which provide that if any such increase is allocated to any such portion of an account balance for the first taxable year of the payee beginning in 2022, the payee may elect to have such portion distributed over a period of years not greater than the period specified by the Secretary in such regulations (and any distributions made in accordance with such election shall be treated for purposes of this section as made in such first taxable year).
What I think it's saying is that if you're over $10 million and you have some non-publicly-traded stock in one or more ESOP accounts, you're supposed to take your special high-balance RMD first from any other retirement accounts you have. If you empty those out and still need to take out some high-balance RMD from your ESOP(s) in 2022, the IRS is supposed to make some regulations for how you can do that over a period of a few years instead of all at once, and it will still count toward the 2022 RMD. In 2023 and later, I guess you'll need to figure out how to liquidate it all at once.
This is really interesting. I'm not sure if this will lead to more or less turnover at my company. On the one hand they can't keep amassing large wealth. On the other hand they will be getting 1-2million dollar penalty free distributions after age 50ish. What stinks is the size and cost of those. Esop lobby is pretty well seated with a bunch of Congress. But no one is going to die on this sword bc ESOPs are few and far between.
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Good lord, the social engineering that goes on with the tax code.
Well...yes. Any tax will create incentives. There's literally no way to tax things without nudging behavior one way or another. Might as well nudge people to do the things you want them to do rather than the things you don't want them to do.
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Hmmmm without mega backdoor roth. Looks like all my leftover money will now have to go to a taxable brokerage account. Guess I can try to utilize mega backdoor roth as much as possible over these last remaining months (unless something changes).
Bummer.
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Hmmmm without mega backdoor roth. Looks like all my leftover money will now have to go to a taxable brokerage account. Guess I can try to utilize mega backdoor roth as much as possible over these last remaining months (unless something changes).
Bummer.
It's not a law yet.
https://www.youtube.com/watch?v=OgVKvqTItto
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Hmmmm without mega backdoor roth. Looks like all my leftover money will now have to go to a taxable brokerage account. Guess I can try to utilize mega backdoor roth as much as possible over these last remaining months (unless something changes).
Bummer.
It's not a law yet.
https://www.youtube.com/watch?v=OgVKvqTItto
while you're correct its not a law YET they tried to put something similar in the trump tax "cuts" that was eventually removed congress has been coming after this for a while i think this portion will likely stay i dont see any reason manchin would oppose this.
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Hmmmm without mega backdoor roth. Looks like all my leftover money will now have to go to a taxable brokerage account. Guess I can try to utilize mega backdoor roth as much as possible over these last remaining months (unless something changes).
Bummer.
For FIRE seeking folks, I think the main impact really is that dividends make planning your income for ACA optimization annoying.
Realistically unless you're taking a long path to FIRE the difference between Roth contributions (via Roth IRA/megabackdoor) and taxable is pretty minimal.
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Dividends are less of an issue than these small real estate partnerships I can no longer hold inside an IRA.
I was giving up the nice depreciation deductions but won't get hit with a surprise capital gain when they sell.
Now I have to plan for the ACA while not knowing if I'll get a $20,000+ capital gain hit in the year they go full cycle.
If they kept the $10mil balance rule in, the effect of holding an accredited investment in an IRA is nil. Usually politicians bend over backwards for the real estate lobby, like leaving the 1031 untouched yet again.
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Good lord, the social engineering that goes on with the tax code.
Well...yes. Any tax will create incentives. There's literally no way to tax things without nudging behavior one way or another. Might as well nudge people to do the things you want them to do rather than the things you don't want them to do.
I feel like nudging and engineering are two completely different levels of complication.
Sent from my iPhone using Tapatalk
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Dividends are less of an issue than these small real estate partnerships I can no longer hold inside an IRA.
I was giving up the nice depreciation deductions but won't get hit with a surprise capital gain when they sell.
Now I have to plan for the ACA while not knowing if I'll get a $20,000+ capital gain hit in the year they go full cycle.
If they kept the $10mil balance rule in, the effect of holding an accredited investment in an IRA is nil. Usually politicians bend over backwards for the real estate lobby, like leaving the 1031 untouched yet again.
But isn’t a permanent elimination of the tax cliff in there too? That would make precise ACA planning much less important.
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Dividends are less of an issue than these small real estate partnerships I can no longer hold inside an IRA.
I was giving up the nice depreciation deductions but won't get hit with a surprise capital gain when they sell.
Now I have to plan for the ACA while not knowing if I'll get a $20,000+ capital gain hit in the year they go full cycle.
If they kept the $10mil balance rule in, the effect of holding an accredited investment in an IRA is nil. Usually politicians bend over backwards for the real estate lobby, like leaving the 1031 untouched yet again.
But isn’t a permanent elimination of the tax cliff in there too? That would make precise ACA planning much less important.
exactly the elimination of the tax cliff and the lower percentage to income are staying in place if this doesnt change. This and the 2 child/childcare portions bring the most value to FIRE people with kids.
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Dividends are less of an issue than these small real estate partnerships I can no longer hold inside an IRA.
I was giving up the nice depreciation deductions but won't get hit with a surprise capital gain when they sell.
Now I have to plan for the ACA while not knowing if I'll get a $20,000+ capital gain hit in the year they go full cycle.
If they kept the $10mil balance rule in, the effect of holding an accredited investment in an IRA is nil. Usually politicians bend over backwards for the real estate lobby, like leaving the 1031 untouched yet again.
But isn’t a permanent elimination of the tax cliff in there too? That would make precise ACA planning much less important.
For those who might be able to manage income down below 200% of FPL, perhaps not - I think that cliff where the silver plans start to become gold / platinum remains. So there is still stuff to improve but definitely a big improvement.
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So since I’m reading this piecemeal with kids screaming in the background, help my understanding. If I’ve got a chunk of traditional retirement money I was planning on converting gradually starting next year at FIRE now I have to do all of that in 2022 if this passes as-is?
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So since I’m reading this piecemeal with kids screaming in the background, help my understanding. If I’ve got a chunk of traditional retirement money I was planning on converting gradually starting next year at FIRE now I have to do all of that in 2022 if this passes as-is?
Only if you will have over $400k in income in FIRE.
For those with less than $400k in income and less than $10M in retirement accounts, the main effect of this is to eliminate non deductible contributions used for the backdoors. I did not see, and someone else mentioned the same, that there doesn't seem to be any provision for non deductible contributions that are sitting in those accounts at the end of 2021 and whether or not they can be converted later without owing taxes.
I figure at this point, the MBR is saving us about $1000 in capital gains taxes (including NIIT) a year. Funny thing though, last year, even though we managed to do the conversion in the Sep/Oct dip, the gains were so high that we owed about that much for the conversion itself, anyway.
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@Even Steven It'll still impact whether or not you can get the Cost Sharing Reduction
https://www.healthcare.gov/glossary/cost-sharing-reduction/
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@Even Steven It'll still impact whether or not you can get the Cost Sharing Reduction
https://www.healthcare.gov/glossary/cost-sharing-reduction/
Thanks. So this is a second tax cliff related to the ACA up to 250% poverty level (~65K for family of 4), which will remain? After browsing a few pages on CSR, I'm not clear on how valuable CSR is. Does it make a significant difference in typical costs, or maybe a big deal at the higher end of health expenses?
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@Even Steven It'll still impact whether or not you can get the Cost Sharing Reduction
https://www.healthcare.gov/glossary/cost-sharing-reduction/
Thanks. So this is a second tax cliff related to the ACA up to 250% poverty level (~65K for family of 4), which will remain? After browsing a few pages on CSR, I'm not clear on how valuable CSR is. Does it make a significant difference in typical costs, or maybe a big deal at the higher end of health expenses?
I mean, healthcare.gov you can run examples yourself, but ran in my zipcode for my wife and I. Screen captures attached of the exact same silver-plan.
At $44K income, there are no additional cost savings - the deductible is $10,900, copays are $35 for drugs, $20 for Doctor, 35% co-insurance for ER or specialist.
At $42K income, the CSR reductions have just kicked in a little - the deductible is $5,990, so almost $4k lower there.
At $24K income then we're getting to maxed out on the CSR savings - $0 deductible, $3 copays. Still $25% coinsurance but the OOP Max is only $3,050.
So depending on medical situation, that can get to be a pretty big deal even at top of range - actually this is a good example of that. $2K of income difference, for someone who routinely hits the deductible, makes a $4K difference just in deductible.
If you're able to get income low enough, savings in addition to the premium tax credit are huge. At that $24K level, you're actually getting a better deal on deductibles and copays and such than any of the Gold Plans, and arguably the Platinum plans as well (platinum, which is much more expensive on premiums, tends to have lower ER and specialist copays, but higher drug and regular doctor copays).
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
I imagine you could game this pretty well for a year or two before they start really looking in to your income estimates, no?
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
Seems like a crazy loop hole, why not just do this on purpose to have artificially low deductibles?
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
Seems like a crazy loop hole, why not just do this on purpose to have artificially low deductibles?
Yeah can anyone elaborate on penalties for getting this wrong.
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
Seems like a crazy loop hole, why not just do this on purpose to have artificially low deductibles?
Yeah can anyone elaborate on penalties for getting this wrong.
I'm not a lawyer, but I suspect it's basically the difference between getting it wrong every now and then (believable, it happens), and getting it wrong year after year. When you send in your application, you do swear that the information is true to the best of your knowledge. Surely at some point on this continuum it would fall under a broad tax fraud statute?
I have no idea whether you would be prosecuted for it, and I don't intend on finding out. Knowingly lying to get tax credits is a very bad idea.
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Yes, the CSRs are a big cliff all by themselves. It's often thousands of dollars of difference in deductibles and co-pays. It doesn't matter as much if you don't expect to use medical services.
Thankfully they cannot be clawed back. If you accidentally underestimate your income you will pay a portion of the subsidized premiums back at tax time (the calculation is complicated, but it's not 100%), but you will have captured the value of the CSRs "for free".
Seems like a crazy loop hole, why not just do this on purpose to have artificially low deductibles?
Yeah can anyone elaborate on penalties for getting this wrong.
I'm not a lawyer, but I suspect it's basically the difference between getting it wrong every now and then (believable, it happens), and getting it wrong year after year. When you send in your application, you do swear that the information is true to the best of your knowledge. Surely at some point on this continuum it would fall under a broad tax fraud statute?
I have no idea whether you would be prosecuted for it, and I don't intend on finding out. Knowingly lying to get tax credits is a very bad idea.
Fair, but based on the previous posts +/- $2000 seems like a reasonable margin of error and has significant impact on CSR. I certainly couldn't estimate my income within $2000, my margin of error is more like +/- $10,000, and I can image for those working on commission it is even greater. I suppose as long as you can check the box "to the best of my knowledge" honestly you are ok. Seems like a lot of incentive to always estimate the low end of your expected range though.
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Right, a $2,000 miss seems very reasonable to me (and I suspect everyone else), especially if you don't have salaried income. Even a $10,000 miss. Sometimes money just falls into your lap, and you shouldn't lose sleep over having written down another number on a form 6 months ago. My point isn't that you should not go out of your way to game it, establishing a clear pattern of abuse.
The CSRs are actually down to the dollar because it's a step function of the percentage of FPL. Something like income $25,250 -> CSR 73, income $25,249 -> CSR 87 (much better).
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Ok, the ACA tax cliff took this thread off on a tangent.
Something most do not realize is there are limits their employee 401k plan has on contributions from highly compensated employees (HCE). Look this up if you are curious - not easily explainable. There is some basis in these retirement savings tax-benefits to make sure these mechanisms are not just used by the well-off but that they are also used heavily by lower income earners. Whether that is what is actually happening is a topic for another time, but that is probably one of the major motivations circulating in DC to remove this Roth backdoor loophole. It just screams social injustice.
With that said, this should be a warning to anyone here that tax codes can change anytime. Will it happen this year and start 2022? Unlikely, but it could happen. I would maybe think 2023 would be more likely if Democrats take more seats in House and Senate.
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HCE limits are not the norm, plenty of companies don't have them. In fact, a plan having limits for HCEs is usually a sign that the plan is kinda shit to begin with.
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HCE limits are not the norm, plenty of companies don't have them. In fact, a plan having limits for HCEs is usually a sign that the plan is kinda shit to begin with.
Hce limits are an IRS law not plan specific. Companies must comply
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HCE limits are not the norm, plenty of companies don't have them. In fact, a plan having limits for HCEs is usually a sign that the plan is kinda shit to begin with.
Hce limits are an IRS law not plan specific. Companies must comply
Perhaps the point is the safe harbors against HCE limits are ... rather easy to hit if the plan is any good...
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HCE limits are not the norm, plenty of companies don't have them. In fact, a plan having limits for HCEs is usually a sign that the plan is kinda shit to begin with.
Hce limits are an IRS law not plan specific. Companies must comply
Perhaps the point is the safe harbors against HCE limits are ... rather easy to hit if the plan is any good...
this is more accurate i can agree to that.
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HCE limits are not the norm, plenty of companies don't have them. In fact, a plan having limits for HCEs is usually a sign that the plan is kinda shit to begin with.
Hce limits are an IRS law not plan specific. Companies must comply
Perhaps the point is the safe harbors against HCE limits are ... rather easy to hit if the plan is any good...
Yes, that's what I meant. It's one thing to set up your 401(k), perhaps early in the company history, with a not-so-great plan that fails the non-discrimination tests. I get it, matching costs money, you have a million more pressing things to do.
But then the IRS sends you a letter that says, hey employer, your plan isn't compliant, you can fix this by:
1) modestly improving your match in one of these 3 ways (https://www.guideline.com/blog/safe-harbor-401k-plan/#setting-up-a-safe-harbor-401(k)) that every custodian in the country already knows about, or
2) adding convoluted HCE restrictions and/or clawbacks in place, communicating them to everyone, wasting everyone's time.
Door #1 is the right thing to do. Door #2 broadcasts to everyone, but especially your most valued employees (the HCEs), how little you care about their retirement security.
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Note you can still fail mega backdoor non discrimination testing even if you're safe harbor.
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Note you can still fail mega backdoor non discrimination testing even if you're safe harbor.
S Corp ESOPs in addition to 401k plans in the same company also create an issue here.
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Note you can still fail mega backdoor non discrimination testing even if you're safe harbor.
That's a good point, completely forgot about that. But at least, if the administrators have any common sense, you're not losing on pre-tax space, which is arguably more important for HCEs.
If I had a plan with a mega backdoor Roth and was told I'm losing, say, 5k of contribution space, I'd much, much, much rather lose it in the after-tax bucket than the pre-tax bucket.
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Sorry about taking this thread on a CSR tangent...
It's always been fascinating, Root of Good does a great job talking about this in his various monthly updates (www.rootofgood.com). CSRs basically make healthcare in the US nearly for a FIREy person with kids. That is still a huge cliff compared to just premium subsidies.
I have an exchange high deductible plan, but it's a fight just to get them to qualify stuff I pay for out of pocket towards my deductible.
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Ah, yes, good discussion on the HCE impacts for both pre-tax and after-tax buckets. I have not heard of a company taking away after-tax contribution space. If it is a pretty rare thing I think that exactly makes the point why some may want to remove the MBR. If everyone started doing it, it might be more noticed. I think it is becoming more widespread.
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It looks like I may stay in government instead of jumping to the private sector until this goes through or is shot down. 457(b) plans are still amazing.
[/quote]
Do you have access to a Roth 457? My 457 plan offers both pre-tax and roth contributions, and I thought it might be better to prioritize roth contributions, especially considering these potential changes.
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It looks like I may stay in government instead of jumping to the private sector until this goes through or is shot down. 457(b) plans are still amazing.
Do you have access to a Roth 457? My 457 plan offers both pre-tax and roth contributions, and I thought it might be better to prioritize roth contributions, especially considering these potential changes.
Mine does not offer a Roth option. However, that's fine with me. We max the pre-tax 457 and split 401(k) & IRA contributions between pre-tax and Roth.
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Roth 457 probably doesn't work quite the way you expect - if you're going to wait until 59.5 or till it into a Ruth IRA someday have at it, but if you want to use it to withdraw before 59.5, read up on the tax treatment upon withdrawal before contributing.
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* No more purchasing investments requiring accredited investor (or similar) status in an IRA after 2021, and if you have any such investments already in your IRA you'll need to dispose of them by the end of 2023.
* No more investing through your IRA in privately-held businesses where you own at least 10% of the shares, or any businesses where you serve on the board of directors (or similar). Any such pre-existing investments will need to be sold by the end of 2023.
Those are rough. While IRA's holding accredited investments shouldn't be a big change. The Privately-held business elimination kills the entire self directed IRA industry. This hurts real estate developers who rely on private money, that is often a self directed IRA, and anyone who would rather invest in assets other than Wall Street. Seems like they need to retool that.
Also, that's a pretty short timeline to unwind these things when many syndications have 5 year holds and Private Equity 10 years.
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This is a horrible piece of tax legislation for most Mustachians. In fact, this whole bill just seems to be a sleuth of a lot of unsavory legislation that will be forced through and accepted by most cause everyone is sort of getting something they want.
Eliminating the mega Roth kills my plans. I just started and now they kill it. There are many better ways to do this but most people using mega Roth are average folks like us who want to save more for retirement as Social Security won't be there for many of us. If anything, this is more a tax on average poorer people and not the Peter Thiels of the world. And I'm sure the Peter Thiels out there will still find a loophole but the average Joe like us will be left losing paying more taxes while only adding $4 billion in tax revenue. And they decide it's better to give $1 billion to a rich country like Israel. Jeez I'm thinking of switching my votes next election cycle.
Too bad there isn't some lobby or anyone who wants to represent for aggressive savers out there in Congress. Looks like our silence means higher taxes on us average folk.
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This is a horrible piece of tax legislation for most Mustachians. In fact, this whole bill just seems to be a sleuth of a lot of unsavory legislation that will be forced through and accepted by most cause everyone is sort of getting something they want.
Eliminating the mega Roth kills my plans. I just started and now they kill it. There are many better ways to do this but most people using mega Roth are average folks like us who want to save more for retirement as Social Security won't be there for many of us. If anything, this is more a tax on average poorer people and not the Peter Thiels of the world. And I'm sure the Peter Thiels out there will still find a loophole but the average Joe like us will be left losing paying more taxes while only adding $4 billion in tax revenue. And they decide it's better to give $1 billion to a rich country like Israel. Jeez I'm thinking of switching my votes next election cycle.
Too bad there isn't some lobby or anyone who wants to represent for aggressive savers out there in Congress. Looks like our silence means higher taxes on us average folk.
Say what?
The megabackdoor impacts mustachians the least of any demographic since the advantage of Roth vs taxable for most mustachians is minimal, due to the fact that most MMM folks retire fast relative to the average person.
I have no idea how your plans could depend on the megabackdoor Roth IRA and be killed entirely by that change.
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This is a horrible piece of tax legislation for most Mustachians. In fact, this whole bill just seems to be a sleuth of a lot of unsavory legislation that will be forced through and accepted by most cause everyone is sort of getting something they want.
Eliminating the mega Roth kills my plans. I just started and now they kill it. There are many better ways to do this but most people using mega Roth are average folks like us who want to save more for retirement as Social Security won't be there for many of us. If anything, this is more a tax on average poorer people and not the Peter Thiels of the world. And I'm sure the Peter Thiels out there will still find a loophole but the average Joe like us will be left losing paying more taxes while only adding $4 billion in tax revenue. And they decide it's better to give $1 billion to a rich country like Israel. Jeez I'm thinking of switching my votes next election cycle.
Too bad there isn't some lobby or anyone who wants to represent for aggressive savers out there in Congress. Looks like our silence means higher taxes on us average folk.
Say what?
The megabackdoor impacts mustachians the least of any demographic since the advantage of Roth vs taxable for most mustachians is minimal, due to the fact that most MMM folks retire fast relative to the average person.
I have no idea how your plans could depend on the megabackdoor Roth IRA and be killed entirely by that change.
Yeah. Having a larger taxable in my opinion is better and more flexible than a large mega back door bc only those contributions are tapable I can borrow against my taxable. Obviously rates won't stay in a cellar forever but. It's likely a much better long term strategy than selling investments
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Will anyone think of the average mega backdoor Roth Joes?
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Will anyone think of the average mega backdoor Roth Joes?
Pretty sure they almost all work in tech. heh.
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Will anyone think of the average mega backdoor Roth Joes?
Pretty sure they almost all work in tech. heh.
True. I utilized the mega backdoor for several years and appreciate that it existed, but it was always a very blatant loophole that we should not be surprised is going away.
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Will anyone think of the average mega backdoor Roth Joes?
The point, which evidently seems to have gone over some people's heads like a 747, is that this legislation which was likely designed to punish the uber rich creates negative impacts on those that are anything but rich, especially mustachians with frugal spending and thus high savings rates. A family with an income almost as low as the 50th percentile could still have benefited from the mega backdoor Roth if they had extremely frugal spending habits. If that doesn't fit your definition of the "average Joe", I don't know what does, but it doesn't change the facts of the situation.
And this is the inherent nature of most legislation with the goal to target the rich. It creeps over time and ends up creating collateral damage to groups that were never the target. This one just happens to save some time and do it early. The federal income tax when it was introduced in the early 1900s had a top marginal rate of 7% that applied to people with an income in today's dollars of $14M. Now, a person with any income above $0 is subject to a 10% marginal rate. Personally, I'm okay with legislation that help someone richer than me prosper when it helps me too, but evidently some people don't care about collateral damage (including to themselves) so long as they get an opportunity to stick it to those filthy evil rich. I'm grateful the poison of envy doesn't cloud my mind.
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Completely agree.
It seems a lot of things to target those darn rich people really ends up being pitting the upper middle class against the middle class against the poor, leaving the truly rich alone.
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Completely agree.
It seems a lot of things to target those darn rich people really ends up being pitting the upper middle class against the middle class against the poor, leaving the truly rich alone.
https://www.kitces.com/blog/biden-american-families-plan-bill-proposed-increase-tax-capital-gains-retirement-reform/
I see plenty of stuff in there that most definitely impacts the “truly” rich.
New capital gains tax. New surcharge. Limitations on section 199A, trusts, estate deductions. And even a section about mega retirement accounts that looks like a direct attack on the famous Thiel maneuver.
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Will anyone think of the average mega backdoor Roth Joes?
The point, which evidently seems to have gone over some people's heads like a 747, is that this legislation which was likely designed to punish the uber rich creates negative impacts on those that are anything but rich, especially mustachians with frugal spending and thus high savings rates. A family with an income almost as low as the 50th percentile could still have benefited from the mega backdoor Roth if they had extremely frugal spending habits. If that doesn't fit your definition of the "average Joe", I don't know what does, but it doesn't change the facts of the situation.
And this is the inherent nature of most legislation with the goal to target the rich. It creeps over time and ends up creating collateral damage to groups that were never the target. This one just happens to save some time and do it early. The federal income tax when it was introduced in the early 1900s had a top marginal rate of 7% that applied to people with an income in today's dollars of $14M. Now, a person with any income above $0 is subject to a 10% marginal rate. Personally, I'm okay with legislation that help someone richer than me prosper when it helps me too, but evidently some people don't care about collateral damage (including to themselves) so long as they get an opportunity to stick it to those filthy evil rich. I'm grateful the poison of envy doesn't cloud my mind.
I would love to see the percentage of people making $63,000 who even have access to a MBR, much less actually take advantage of it.
This proposal would bring the actual rules more inline with the stated restrictions and eliminate something that depended largely on the luck of the draw for W2 employees.
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Just get rid of 401ks and income limits and let everyone put $X (hopefullly at least $40-$50k) in an IRA.
None of this should be based on employment luck.
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Just get rid of 401ks and income limits and let everyone put $X (hopefullly at least $40-$50k) in an IRA.
None of this should be based on employment luck.
Completely agree with this. But the premise that this bill kills mustachians is wrong. It lowers the price of the ACA and gets rid of the cliff it also gives more targeted money to parents and people.looking to buy EVs. Losing mbdr for the ACA alone is worth it 10 fold for people who plan to retire early.
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Just get rid of 401ks and income limits and let everyone put $X (hopefullly at least $40-$50k) in an IRA.
None of this should be based on employment luck.
Completely agree with this. But the premise that this bill kills mustachians is wrong. It lowers the price of the ACA and gets rid of the cliff it also gives more targeted money to parents and people.looking to buy EVs. Losing mbdr for the ACA alone is worth it 10 fold for people who plan to retire early.
Yesssssss.
There are already a dozen options, but oh no, my name is John McJohnnnyJohnson from the great state of Statefulstate, and after lengthy consultation with my constituents, I am introducing this bill that will add option #13, but this one is simpler and better than all the others, promise.
Every. Goddamn. Year.
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The people who feel entitled to a particular tax advantaged "Beautiful mind" like retirement process I think are completely missing the point, in my opinion, of being retired. A+ for effort and doing your homework and following through with setting it all up - kudos and no judgement on taking advantage of a legal process. If one tax change screws over your FIRE plan, causing you to fret out it like you are seeing Jason with a pair of mustache trimmers then, to me, that sounds like a whole bunch of stress filled paranoia living that you really should leave right next to your Swingline stapler on your way out.
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The people who feel entitled to a particular tax advantaged "Beautiful mind" like retirement process I think are completely missing the point, in my opinion, of being retired. A+ for effort and doing your homework and following through with setting it all up - kudos and no judgement on taking advantage of a legal process. If one tax change screws over your FIRE plan, causing you to fret out it like you are seeing Jason with a pair of mustache trimmers then, to me, that sounds like a whole bunch of stress filled paranoia living that you really should leave right next to their Swingline stapler on your way out.
.... huh?
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.... huh?
Tax changes are a fact of life. There is a lot of complaining about this proposed law change and my point is put yourself in a position where you are resilient to tax changes.
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I guess my "huh?" is more that you seem to be reacting far more strongly to a non-existent reaction than anyone has voiced in this thread.
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Sounds like somebody has a case of the Mondays.
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I don't think it was that strong, but my writing style could have been interpreted that way. astvilla's post does deserve that kind of reaction. "Eliminating the mega Roth kills my plans". It seems you replied to it as well.
Sounds like somebody has a case of the Mondays.
Maybe they should make the limit for MBR a penny? No one will notice.
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Personally I love the MBR and will be sad when it goes away. On the other hand I see how unfair it is that only some have access to it. I also recognize that part of living in a society with things we like is paying for said things. I’d rather have nice things than not (bridges that don’t collapse, drinking water that doesn’t poison, and so forth), and if we are going to have them then someone has to pay for them. It seems this is an attempt to have those with more means pay for the things we have all decided we want.
What are the alternatives? Either we do without, and the US is already rather stingy compared to industrialized nations, or we make someone with less money pay. Either of those options seem worse to me.
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This is a horrible piece of tax legislation for most Mustachians. In fact, this whole bill just seems to be a sleuth of a lot of unsavory legislation that will be forced through and accepted by most cause everyone is sort of getting something they want.
Eliminating the mega Roth kills my plans. I just started and now they kill it. There are many better ways to do this but most people using mega Roth are average folks like us who want to save more for retirement as Social Security won't be there for many of us. If anything, this is more a tax on average poorer people and not the Peter Thiels of the world. And I'm sure the Peter Thiels out there will still find a loophole but the average Joe like us will be left losing paying more taxes while only adding $4 billion in tax revenue. And they decide it's better to give $1 billion to a rich country like Israel. Jeez I'm thinking of switching my votes next election cycle.
Too bad there isn't some lobby or anyone who wants to represent for aggressive savers out there in Congress. Looks like our silence means higher taxes on us average folk.
First of all, if your FIRE plan depended on a tax loophole, it was a shitty plan.
Second, average folks? You have to make $140k single or $208k married before it even comes into the equation, which puts you in the top 10% of earners in the country.
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This is a horrible piece of tax legislation for most Mustachians. In fact, this whole bill just seems to be a sleuth of a lot of unsavory legislation that will be forced through and accepted by most cause everyone is sort of getting something they want.
Eliminating the mega Roth kills my plans. I just started and now they kill it. There are many better ways to do this but most people using mega Roth are average folks like us who want to save more for retirement as Social Security won't be there for many of us. If anything, this is more a tax on average poorer people and not the Peter Thiels of the world. And I'm sure the Peter Thiels out there will still find a loophole but the average Joe like us will be left losing paying more taxes while only adding $4 billion in tax revenue. And they decide it's better to give $1 billion to a rich country like Israel. Jeez I'm thinking of switching my votes next election cycle.
Too bad there isn't some lobby or anyone who wants to represent for aggressive savers out there in Congress. Looks like our silence means higher taxes on us average folk.
First of all, if your FIRE plan depended on a tax loophole, it was a shitty plan.
Second, average folks? You have to make $140k single or $208k married before it even comes into the equation, which puts you in the top 10% of earners in the country.
Did they switch from just straight eliminating the mega backdoor roth to adding income limits? I was hoping they would do that. We put about 31k in my wife's mega backdoor roth each year while falling well below the income limits you list above
Edit: or were you talking about "regular" backdoor roth?
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Backdoor Roth had proposed income limits (due to income cap on Roth conversions).
Mega backdoor would go away entirely under these changes.
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Backdoor Roth had proposed income limits (due to income cap on Roth conversions).
Mega backdoor would go away entirely under these changes.
I'd argue this might be good for mustachians long term. In reference to the how rich people avoid taxes thread. Building a reasonably sized taxable account with about 5 years living expenses and borrowing margin or an loc against it should allow a mustachians to never sell equities. Worst case you have to move some Roth contributions to taxable to cover some calls if you hit some bad sorry in the beginning.
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Found this linked from a CNBC news article:
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
[Sec. 138302]
If an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit
...
This provision is effective tax years beginning after December 31, 2021.
Seems like the proposed legislation does avoid taxpayers earning under $400k, as I see that clause in other areas. Someone with $1 billion in the IRAs doesn't have to take any action if their income is $390k.
It doesn't seem to be retroactive (if passed), as the earliest parts start in 2022 (but I could have missed some).
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Worst case you have to move some Roth contributions to taxable to cover some calls if you hit some bad sorry in the beginning.
I'd think that the worst case is you rack up a couple decades worth of living expenses in margin loans, something happens in the year 2040 to cause interest rates to rise to the point where you don't feel that holding that much debt at that rate is a good idea anymore, and you need to realize a million dollars of capital gains in a short period of time in order to extinguish the debt. That gets expensive.
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Worst case you have to move some Roth contributions to taxable to cover some calls if you hit some bad sorry in the beginning.
I'd think that the worst case is you rack up a couple decades worth of living expenses in margin loans, something happens in the year 2040 to cause interest rates to rise to the point where you don't feel that holding that much debt at that rate is a good idea anymore, and you need to realize a million dollars of capital gains in a short period of time in order to extinguish the debt. That gets expensive.
If rates appreciate to that the returns on keeping money invested will far outweigh the cost of those taxes. And at that point I will have converted over 2 million from trad to roth that can be tapped to pay off the debt if needed.
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If you have kids <18 the average mustachian WILL be better off with this bill. If not you're income is so high you can FIRE soon anyway and reap the benefits of the means tested CTC later.
Putting your money in a taxable vs an MBR is just not that big of a deal.
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If you have kids <18 the average mustachian WILL be better off with this bill. If not you're income is so high you can FIRE soon anyway and reap the benefits of the means tested CTC later.
As a modest income parent of 3 offspring all >18, I'm on the other end of this particular bill. Mostly I'm reading the "pay fors" section rather than the "goodies" section. Oh well. #mustachianpeopleproblems.
Putting your money in a taxable vs an MBR is just not that big of a deal.
With my passive index LTBH approach, agreed. For active or yield investors with a long time frame, maybe not so much.
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If you have kids <18 the average mustachian WILL be better off with this bill.
They WILL according to who? Politicians? Data?
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If you have kids <18 the average mustachian WILL be better off with this bill.
They WILL according to who? Politicians? Data?
the avg mustachian would get an increase of 1k -1600 per child under this bill and have their child care costs cut by 50% up to the first 16k in spending on childcare vs 5k at their marginal rate or 20% before. They also would receive increased ACA benefits. they lose MBDR - which the avg mustachian probably doesnt have access to and may not even have the income to fund and maybe BDR
Poll in 2017
https://forum.mrmoneymustache.com/welcome-to-the-forum/what's-your-income-level-and-savings-rate/
i'd say the avg mustachian likely benefits from this based on the numbers here
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Yup @boarder42 articulated it well.
and I'd go even further and say it helps the average working mustachian and those who have already FIREd due to ACA fixes.
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If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
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If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
https://www.cnn.com/2021/09/25/politics/house-budget-committee-biden-economic-agenda/index.html
its a bill you understand a bill is proposed legislation right and thats all that was stated so it can be said with certainty this will benefit the avg mustachian with sub 18yo kids- changes to this BILL have not been implemented and this is the only BILL on the table today being discussed around 3.5T
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If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
At the end of the day moderate democrats will make this a worse bill just like they did to the ACA. It won't be good enough for Americans to actually be proud of it, but it will satiate their anger towards the Democrats inability to actually do something.
The GOP will then pretend like they actually pass laws in 2022 or won't cut your benefits, will win the house, and then nothing else (except tax cuts and military spending) will happen again until the next Democrat trifecta in 2030.
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If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
https://www.cnn.com/2021/09/25/politics/house-budget-committee-biden-economic-agenda/index.html
its a bill you understand a bill is proposed legislation right and thats all that was stated so it can be said with certainty this will benefit the avg mustachian with sub 18yo kids- changes to this BILL have not been implemented and this is the only BILL on the table today being discussed around 3.5T
Your link is from 3 weeks ago - a bit out of date for pending legislation. It's a bit hard to follow all that text without a period. But nobody is discussing 3.5T in Congress, because it can't pass.
Pelosi said she was bringing the bill to a vote weeks ago - then didn't. She knew the votes weren't there. Manchin is quoted in the article I mentioned (from today) as having a 1.5T target, and will vote down a 3.5T bill. So that's dead. Rumors are that negotiations are just over 2.0T right now. Until the last 2 Democrats are in favor, those discussions will continue.
I wonder if half the spending is dropped, will half the tax cuts be dropped?
-
If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
https://www.cnn.com/2021/09/25/politics/house-budget-committee-biden-economic-agenda/index.html
its a bill you understand a bill is proposed legislation right and thats all that was stated so it can be said with certainty this will benefit the avg mustachian with sub 18yo kids- changes to this BILL have not been implemented and this is the only BILL on the table today being discussed around 3.5T
Your link is from 3 weeks ago - a bit out of date for pending legislation. It's a bit hard to follow all that text without a period. But nobody is discussing 3.5T in Congress, because it can't pass.
Pelosi said she was bringing the bill to a vote weeks ago - then didn't. She knew the votes weren't there. Manchin is quoted in the article I mentioned (from today) as having a 1.5T target, and will vote down a 3.5T bill. So that's dead. Rumors are that negotiations are just over 2.0T right now. Until the last 2 Democrats are in favor, those discussions will continue.
I wonder if half the spending is dropped, will half the tax cuts be dropped?
It doesnt change the statement made which is what you were disputing - There is only one BILL on the table thats made it out of commitee and thats what the original poster was referencing. I agree that this bill as written will be very unlikley to pass manchin but it doesnt change the statement.
This entire thread is based on the premise of what was written in that bill we should probably just quit discussing everything about the bill on these forums as its completey going to change and until the dems agree on something its worthless brain energy.
put some periods there for you.
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I would love to see the percentage of people making $63,000 who even have access to a MBR, much less actually take advantage of it.
Not sure about percentages, but I make $70k ($62.5k last year) and take advantage of the MBDR.
I am not wealthy, yet this affects me directly.
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I would love to see the percentage of people making $63,000 who even have access to a MBR, much less actually take advantage of it.
Not sure about percentages, but I make $70k ($62.5k last year) and take advantage of the MBDR.
I am not wealthy, yet this affects me directly.
How much are you actually putting in though?
If you already have a Roth IRA and Roth 401k, you already have the ability to put away $26k in roth accounts. (Or close to 33k if you're over 50). So you're stuffing what? another $5k with MBDR?
Closing off the rare 70k worker from additional 5k of tax shelters compared to the mega wealthy who are regularly putting in 10x that amount every year is well worth it to society.
Personally, I think it would just be easier to put a hard ceiling on retirement accounts ($5MM per person $10MM per couple) and that would basically solve all of these loopholes without having to change all the rules around.
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Closing off the rare 70k worker from additional 5k of tax shelters compared to the mega wealthy who are regularly putting in 10x that amount every year is well worth it to society.
I don't understand how the mega wealthy could take more advantage of the MBDR - I thought there was a hard limit of $58K per person per year regardless of income. Maybe I'm missing something.
Personally, I think it would just be easier to put a hard ceiling on retirement accounts ($5MM per person $10MM per couple) and that would basically solve all of these loopholes without having to change all the rules around.
You might be happy to know that this is effectively one of the additional "pay fors" in the only extant version of the $3.5T bill. I don't recall the details, but people with large retirement accounts around the numbers you mentioned are required to make additional distributions (50% of the excess IIRC). I believe they are also limited in what they can contribute or convert.
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I would be all for "you can contribute X dollars lilfetime" and being able to do it anytime I am able.
If it's "your account can only have X dollars before it's taxed" that one doesn't make a lot of sense. What if I'm at X+Y dollars at some point, don't make any withdrawals, and then by the time I am ready to withdraw the money it has crashed and is worth X-Z dollars? Did I already have to pay a tax? It just doesn't make a ton of sense.
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I would be all for "you can contribute X dollars lilfetime" and being able to do it anytime I am able.
If it's "your account can only have X dollars before it's taxed" that one doesn't make a lot of sense. What if I'm at X+Y dollars at some point, don't make any withdrawals, and then by the time I am ready to withdraw the money it has crashed and is worth X-Z dollars? Did I already have to pay a tax? It just doesn't make a ton of sense.
The proposal we're discussing is that anyone making over 400k/ year and has over something like 10MM in accounts must withdraw 50% of the overage. (actual numbers might be off, but you get the gist).
If they somehow, withdraw the money down to the limit. Then in the following years when their account sinks below that limit, then can contribute again without having a forced withdraw.
Nothing complicated. And also nothing anyone in this thread would ever actually be in danger of hitting.
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Closing off the rare 70k worker from additional 5k of tax shelters compared to the mega wealthy who are regularly putting in 10x that amount every year is well worth it to society.
I don't understand how the mega wealthy could take more advantage of the MBDR - I thought there was a hard limit of $58K per person per year regardless of income. Maybe I'm missing something.
That's just on your 401k. There's still the $6k allowance on IRA's. So the individual limit is closer to $65k.
Extremely wealthy individuals might also include their wife on the pay roll and "overpay" them for their contributions (like being a "board member" or "consultant"), and wrap up another $65k. So a couple could reasonably put $130k every year in a Roth, if they can line it up right.
That's why I think it's silly to be complaining about an extra $5k in your Roth. The rich paying more in taxes, funding our society, creating a better safety net, and increasing the benefits we receive from the government far out pace the marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth? Whereas a number of wealthy people have used this loophole to avoid literally millions of dollars in taxes.
There's also the value of potentially lowering the medicare age 5-10 years, or having dental added, keeping the child tax credit, shoring up social security to maintain current benefit levels, not dying when the bridge you're driving over collapses. All of which far exceed the tax savings of a couple extra grand in a Roth.
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@FIPurpose, I think I misunderstood your 10x number to refer to 10x the MBDR limit, not 10x the $5K additional amount of the other poster.
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I would love to see the percentage of people making $63,000 who even have access to a MBR, much less actually take advantage of it.
Not sure about percentages, but I make $70k ($62.5k last year) and take advantage of the MBDR.
I am not wealthy, yet this affects me directly.
How much are you actually putting in though?
If you already have a Roth IRA and Roth 401k, you already have the ability to put away $26k in roth accounts. (Or close to 33k if you're over 50). So you're stuffing what? another $5k with MBDR?
Closing off the rare 70k worker from additional 5k of tax shelters compared to the mega wealthy who are regularly putting in 10x that amount every year is well worth it to society.
How much I am contributing is besides the point. The point is that I am making less than the median household income, yet am able to (and do) take advantage of this.
To answer your question though, I contributed:
$7,764 in 2019 when I was making $59,902 and $7,952 in 2021 when I am making $70k.
That being said, I am also making contributions to a taxable account so actually could afford to contribute more like $12k/yr via the MBDR if I wanted to.
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
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As I don''t live in the US the tax issues discussed are of limited relevance to me, but during my time at this forum I'm a bit surprised that there (at least to my eyes) seems to be rather little discussion about long-term risks from substantial changes in the tax code over time, what I have seen mostly relates to the ACA. Over decadeds a lot of things that seem very "un-american" can happen with potentially large consequences. As a - at least to US eyes - fairly radical example we have tax on wealth, which effectitvely makes the 4% rule into the 3% rule as the deductible is very low And the actual tax rate and the weighting of how bonds vs real estate vs equities vs cash can change from governent to goverment (and it does) making the waters a bit rougher to navigate. On the other hand we have much lower property taxes and don't need to budget for massive health care costs so cherrypicking one single item is also not very constructive when comparing tax regimes across nations (or states).
Granted, changes in the tax code and other areas affecting long-time financial planning can swing the other way as well during the same time frame and lots of other good and bad things can and some will happen over the next decades, but if I lived in the US I would view changes in tax code as one of the main risks I was exposed to.
The definition of "rich" is also in flux, we have tax on wealth after the first ~200k USD of (taxable) net worth, but debt is deducted and primary residence is given very favouralbe tax treatment compared to other asset classes. I wouldn't consider a net worh of 200k USD anywhere near rich but our government does, apparantly. Around 13% of the population over 18 years pay wealth tax, but for the majority the sums in question are pretty small.
Some years ago the system for property tax was revamped here and primary residence was, for wealth tax purposes, weighted at 25% of assessed market value. As one academic commented "there are a lot of numbers between 25% and 100%.
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As I don''t live in the US the tax issues discussed are of limited relevance to me, but during my time at this forum I'm a bit surprised that there (at least to my eyes) seems to be rather little discussion about long-term risks from substantial changes in the tax code over time, what I have seen mostly relates to the ACA. Over decadeds a lot of things that seem very "un-american" can happen with potentially large consequences. As a - at least to US eyes - fairly radical example we have tax on wealth, which effectitvely makes the 4% rule into the 3% rule as the deductible is very low And the actual tax rate and the weighting of how bonds vs real estate vs equities vs cash can change from governent to goverment (and it does) making the waters a bit rougher to navigate. On the other hand we have much lower property taxes and don't need to budget for massive health care costs so cherrypicking one single item is also not very constructive when comparing tax regimes across nations (or states).
Granted, changes in the tax code and other areas affecting long-time financial planning can swing the other way as well during the same time frame and lots of other good and bad things can and some will happen over the next decades, but if I lived in the US I would view changes in tax code as one of the main risks I was exposed to.
The definition of "rich" is also in flux, we have tax on wealth after the first ~200k USD of (taxable) net worth, but debt is deducted and primary residence is given very favouralbe tax treatment compared to other asset classes. I wouldn't consider a net worh of 200k USD anywhere near rich but our government does, apparantly. Around 13% of the population over 18 years pay wealth tax, but for the majority the sums in question are pretty small.
Some years ago the system for property tax was revamped here and primary residence was, for wealth tax purposes, weighted at 25% of assessed market value. As one academic commented "there are a lot of numbers between 25% and 100%.
currently the numbers for weatlh and income testing are very high in this country 450k income and 10MM in wealth before these taxes kick in - at least in the proposed plan. i would say the risk to a mustachian in the tax space is low as it seems while we're moving more liberal it will be a slow and arduous process. maybe this affects my kids but I can't see taxes getting into the middle class anytime soon to support these
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it will be a slow and arduous process. maybe this affects my kids but I can't see taxes getting into the middle class anytime soon to support these
yeah, fair point. These things tend to move slowly generally whie trending in one or another direction.
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If you have kids <18 the average mustachian WILL be better off with this bill.
"WILL" describes certainty, not proposed legislation that cannot pass without changes. Especially since Manchin is attacking that specific part of the bill, while also demanding half the spending be dropped.
https://www.npr.org/2021/10/13/1044543025/united-against-higher-spending-centrist-democrats-dont-agree-on-what-to-cut-or-k
"My number has been 1.5. I've been very clear — you all have got the outline on how I got there," Manchin said last week.
...
For example, Manchin wants to change one policy Democrats see as a cornerstone of their proposal — the child tax credit ... But Manchin has insisted that these benefits should be "means tested" going forward ..."
https://www.cnn.com/2021/09/25/politics/house-budget-committee-biden-economic-agenda/index.html
its a bill you understand a bill is proposed legislation right and thats all that was stated so it can be said with certainty this will benefit the avg mustachian with sub 18yo kids- changes to this BILL have not been implemented and this is the only BILL on the table today being discussed around 3.5T
Your link is from 3 weeks ago - a bit out of date for pending legislation. It's a bit hard to follow all that text without a period. But nobody is discussing 3.5T in Congress, because it can't pass.
Pelosi said she was bringing the bill to a vote weeks ago - then didn't. She knew the votes weren't there. Manchin is quoted in the article I mentioned (from today) as having a 1.5T target, and will vote down a 3.5T bill. So that's dead. Rumors are that negotiations are just over 2.0T right now. Until the last 2 Democrats are in favor, those discussions will continue.
I wonder if half the spending is dropped, will half the tax cuts be dropped?
It doesnt change the statement made which is what you were disputing - There is only one BILL on the table thats made it out of commitee and thats what the original poster was referencing. I agree that this bill as written will be very unlikley to pass manchin but it doesnt change the statement.
This entire thread is based on the premise of what was written in that bill we should probably just quit discussing everything about the bill on these forums as its completey going to change and until the dems agree on something its worthless brain energy.
put some periods there for you.
Look at the original post I quoted - you didn't even write it. To that other poster, I disputed that child tax credits are a certainty, that they "WILL" happen if the bill passes.
Why did you say "quit discussing everything" and then continue posting?
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
I'm not really following your numbers here. You said in a previous post that you make 70k. But that you also use 8k worth of MBDR.
Even just thinking this through then:
5k - FICA Taxes
6k - IRA
19.5k - 401k
8k - MBDR
12k - Brokerage
5-8k? - Other Taxes
So then you're saying you're living on less than 15k? I'm not saying that's impossible, but that's a pretty low level of spending even for MMM.
But let me answer your other question/point:
The money you put into a Roth is not the benefit you get out of it. The benefit is that your returns are tax free. So you're saving the value of CG taxes. For most of us here that means somewhere between 0-15%, though closer to 0% in retirement since you have to exceed $80k(married) of income. (So already, people who earn more than $450k of CG's per year are getting more value out of a Roth)
Consider the value of a single year's contribution. (we can do both scenarios)
$5k in 30 years will be worth $30-50k
$12k in 30 years will be worth $70-120k
So you are saving CG taxes on:
($5k) 25-45k
($12k) 58-108k
You're in retirement and want to withdraw $100k. That means the effective tax rate on what you withdrew if it had only been in a brokerage account is 3%.
So then the effective value of the taxes you're saving each year:
($5k) $750 - 1,300
($12k) $1,740 - 3,200
And that's how much you're saving 30 years from now, not today.
I'm not saying that it's nothing, but it's not that fantastic of a savings vehicle for most Mustachians. For the ultra rich, they're are getting 5-10x the tax savings you are simply by where you are on the tax schedule. The benefits of the bill far outweigh the value of losing MBDR.
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
I'm not really following your numbers here. You said in a previous post that you make 70k. But that you also use 8k worth of MBDR.
Even just thinking this through then:
5k - FICA Taxes
6k - IRA
19.5k - 401k
8k - MBDR
12k - Brokerage
5-8k? - Other Taxes
So then you're saying you're living on less than 15k? I'm not saying that's impossible, but that's a pretty low level of spending even for MMM.
But let me answer your other question/point:
The money you put into a Roth is not the benefit you get out of it. The benefit is that your returns are tax free. So you're saving the value of CG taxes. For most of us here that means somewhere between 0-15%, though closer to 0% in retirement since you have to exceed $80k(married) of income. (So already, people who earn more than $450k of CG's per year are getting more value out of a Roth)
Consider the value of a single year's contribution. (we can do both scenarios)
$5k in 30 years will be worth $30-50k
$12k in 30 years will be worth $70-120k
So you are saving CG taxes on:
($5k) 25-45k
($12k) 58-108k
You're in retirement and want to withdraw $100k. That means the effective tax rate on what you withdrew if it had only been in a brokerage account is 3%.
So then the effective value of the taxes you're saving each year:
($5k) $750 - 1,300
($12k) $1,740 - 3,200
And that's how much you're saving 30 years from now, not today.
I'm not saying that it's nothing, but it's not that fantastic of a savings vehicle for most Mustachians. For the ultra rich, they're are getting 5-10x the tax savings you are simply by where you are on the tax schedule. The benefits of the bill far outweigh the value of losing MBDR.
Good point. Didn't think about it like this before.
My wife and I make around 170k combined and she has access to a MBDR. The last 2 years we have put in 31k each year. If this passes, next year we will move this 31k to a traditional brokerage account.
In retirement, we plan to live on around 60k/yr. So we would essentially not pay taxes on our capital gains or any dividends. The only way I can think that this will hurt us (not that I am complaining) is that we will have to pay taxes on the dividends before retirement while our income is 170k. I'm projecting around 500k in a brokerage account by the time we retire, so that year before retirement we would pay $1500 extra in taxes (2% dividend yield = $10k * .15 = $1500). Still not bad at all!
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
I'm not really following your numbers here. You said in a previous post that you make 70k. But that you also use 8k worth of MBDR.
Even just thinking this through then:
5k - FICA Taxes
6k - IRA
19.5k - 401k
8k - MBDR
12k - Brokerage
5-8k? - Other Taxes
So then you're saying you're living on less than 15k? I'm not saying that's impossible, but that's a pretty low level of spending even for MMM.
But let me answer your other question/point:
The money you put into a Roth is not the benefit you get out of it. The benefit is that your returns are tax free. So you're saving the value of CG taxes. For most of us here that means somewhere between 0-15%, though closer to 0% in retirement since you have to exceed $80k(married) of income. (So already, people who earn more than $450k of CG's per year are getting more value out of a Roth)
Consider the value of a single year's contribution. (we can do both scenarios)
$5k in 30 years will be worth $30-50k
$12k in 30 years will be worth $70-120k
So you are saving CG taxes on:
($5k) 25-45k
($12k) 58-108k
You're in retirement and want to withdraw $100k. That means the effective tax rate on what you withdrew if it had only been in a brokerage account is 3%.
So then the effective value of the taxes you're saving each year:
($5k) $750 - 1,300
($12k) $1,740 - 3,200
And that's how much you're saving 30 years from now, not today.
I'm not saying that it's nothing, but it's not that fantastic of a savings vehicle for most Mustachians. For the ultra rich, they're are getting 5-10x the tax savings you are simply by where you are on the tax schedule. The benefits of the bill far outweigh the value of losing MBDR.
Good point. Didn't think about it like this before.
My wife and I make around 170k combined and she has access to a MBDR. The last 2 years we have put in 31k each year. If this passes, next year we will move this 31k to a traditional brokerage account.
In retirement, we plan to live on around 60k/yr. So we would essentially not pay taxes on our capital gains or any dividends. The only way I can think that this will hurt us (not that I am complaining) is that we will have to pay taxes on the dividends before retirement while our income is 170k. I'm projecting around 500k in a brokerage account by the time we retire, so that year before retirement we would pay $1500 extra in taxes (2% dividend yield = $10k * .15 = $1500). Still not bad at all!
Yeah this is a good point. You could compare the 2 and say that the tax you pay on the 2% dividend (if you're in the 15% category, though the 70k example would likely not be and could be collecting qualified dividends at a 0% tax rate without the barrier of a Roth account)
That would equate to a .3% drag on investment returns. So basically, if you're in the 100-450k / year range, you could say that you're losing out on that compounding interest of .3% if comparing to a roth account (which isn't nothing for sure!) There's also the whole topic on what parts of your portfolio to put where for maximum advantage.
For the $5k example for 30 years that comes out to 2-4k of lost compounding. But again, you could really only claim these savings if you're earning six figures. Just more evidence that the richer you get, the exponentially larger these savings become.
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Right, loss of the mega backdoor would have the following impacts for moderate-income Mustachians as far as I can tell:
* Need to pay tax on any dividends or capital gains realized from those investments, which could include taxes paid at a relatively high rate while still working.
* Need to count income from those investments toward MAGI which could have an effect on post-retirement costs such as ACA health insurance premiums.
* Any amounts not spent during your lifetime will pass on to your heirs in taxable form (with stepped-up basis as of now) instead of being eligible for a further ten years of sheltering in an inherited Roth account.
Those costs definitely aren't nothing, but they also aren't likely to be humungous for most of us. Realizing that this was always a blatant loophole, we shouldn't be surprised or dismayed that they would close it eventually. It makes no sense at all to have a $19.5k Roth 401(k) limit, except for those who work for companies that have made the magic incantations in their plan documentation to allow a further $25k-ish.
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Another possibility is wealth taxes excluding retirement accounts.
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
I'm not really following your numbers here. You said in a previous post that you make 70k. But that you also use 8k worth of MBDR.
Even just thinking this through then:
5k - FICA Taxes
6k - IRA
19.5k - 401k
8k - MBDR
12k - Brokerage
5-8k? - Other Taxes
So then you're saying you're living on less than 15k? I'm not saying that's impossible, but that's a pretty low level of spending even for MMM.
But let me answer your other question/point:
The money you put into a Roth is not the benefit you get out of it. The benefit is that your returns are tax free. So you're saving the value of CG taxes. For most of us here that means somewhere between 0-15%, though closer to 0% in retirement since you have to exceed $80k(married) of income. (So already, people who earn more than $450k of CG's per year are getting more value out of a Roth)
Consider the value of a single year's contribution. (we can do both scenarios)
$5k in 30 years will be worth $30-50k
$12k in 30 years will be worth $70-120k
So you are saving CG taxes on:
($5k) 25-45k
($12k) 58-108k
You're in retirement and want to withdraw $100k. That means the effective tax rate on what you withdrew if it had only been in a brokerage account is 3%.
So then the effective value of the taxes you're saving each year:
($5k) $750 - 1,300
($12k) $1,740 - 3,200
And that's how much you're saving 30 years from now, not today.
I'm not saying that it's nothing, but it's not that fantastic of a savings vehicle for most Mustachians. For the ultra rich, they're are getting 5-10x the tax savings you are simply by where you are on the tax schedule. The benefits of the bill far outweigh the value of losing MBDR.
I don't mean to get bogged down in my specific numbers but in an effort to be transparent... my W2 is $70k, I make a few thousand elsewhere, max out tIRA, t401k, and HSA (which brings my current tax liability down), and my spending is ~$18k/yr.
So far in 2021, I have contributed $6,900 to my taxable account, $7,952.51 via MBDR, and could contribute another $4,087.23 via MBDR if I continued but want to make a clean cut in case MBDR goes away on 1/1 so that will likely go to my taxable account.
Assuming a 7% return (to adjust for inflation) on a $12k contribution, that's a value of $91k in 2021 dollars after 30 years.
So using your $100k number, that's a savings of $2,740 per year (in 2021 dollars) not accounting for dividends.
I'm not making any statements for or against closing the loophole, all that I am saying is that for someone in the middle class, such as myself, to save thousands of dollars a year in taxes is pretty big and that getting rid of the MBDR will cost me (and whomever else is doing something similar) thousands of dollars per year. Therefore, this does not just affect the wealthy.
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That's why I think it's silly to be complaining about an extra $5k in your Roth.
...
marginal benefit of being able to stick an extra $5k a year in a Roth. This person is at most saving $1-5k in taxes 30-50 years from now by having that money in a Roth
...
All of which far exceed the tax savings of a couple extra grand in a Roth.
Not complaining, just stating the fact that it's not only the rich who will be affected by this.
Also, having the ability to contribute an extra $12k/yr (even 5k if that was the number) to a Roth account is not at all marginal, at least not to me (the one that this is benefiting).
That's $1.13M (inflation adjusted) of tax free money after 30 years (or $472k at $5k/yr).
Not sure how you came to a total tax savings of $1-5k but I digress.
I'm not really following your numbers here. You said in a previous post that you make 70k. But that you also use 8k worth of MBDR.
Even just thinking this through then:
5k - FICA Taxes
6k - IRA
19.5k - 401k
8k - MBDR
12k - Brokerage
5-8k? - Other Taxes
So then you're saying you're living on less than 15k? I'm not saying that's impossible, but that's a pretty low level of spending even for MMM.
But let me answer your other question/point:
The money you put into a Roth is not the benefit you get out of it. The benefit is that your returns are tax free. So you're saving the value of CG taxes. For most of us here that means somewhere between 0-15%, though closer to 0% in retirement since you have to exceed $80k(married) of income. (So already, people who earn more than $450k of CG's per year are getting more value out of a Roth)
Consider the value of a single year's contribution. (we can do both scenarios)
$5k in 30 years will be worth $30-50k
$12k in 30 years will be worth $70-120k
So you are saving CG taxes on:
($5k) 25-45k
($12k) 58-108k
You're in retirement and want to withdraw $100k. That means the effective tax rate on what you withdrew if it had only been in a brokerage account is 3%.
So then the effective value of the taxes you're saving each year:
($5k) $750 - 1,300
($12k) $1,740 - 3,200
And that's how much you're saving 30 years from now, not today.
I'm not saying that it's nothing, but it's not that fantastic of a savings vehicle for most Mustachians. For the ultra rich, they're are getting 5-10x the tax savings you are simply by where you are on the tax schedule. The benefits of the bill far outweigh the value of losing MBDR.
I don't mean to get bogged down in my specific numbers but in an effort to be transparent... my W2 is $70k, I make a few thousand elsewhere, max out tIRA, t401k, and HSA (which brings my current tax liability down), and my spending is ~$18k/yr.
So far in 2021, I have contributed $6,900 to my taxable account, $7,952.51 via MBDR, and could contribute another $4,087.23 via MBDR if I continued but want to make a clean cut in case MBDR goes away on 1/1 so that will likely go to my taxable account.
Assuming a 7% return (to adjust for inflation) on a $12k contribution, that's a value of $91k in 2021 dollars after 30 years.
So using your $100k number, that's a savings of $2,740 per year (in 2021 dollars) not accounting for dividends.
I'm not making any statements for or against closing the loophole, all that I am saying is that for someone in the middle class, such as myself, to save thousands of dollars a year in taxes is pretty big and that getting rid of the MBDR will cost me (and whomever else is doing something similar) thousands of dollars per year. Therefore, this does not just affect the wealthy.
I actually got that a little wrong.
If you withdrew 100k in one year in retirement, you'd have saved about $0 in taxes. (15% bracket starts at 80k married, but I didn't include that you'd also have the 24k standard deduction) Especially now that you said that you use tIRA and t401k to lower you income. You'd be solidly in the 0% tax bracket on qualified dividends and even while working your capital gains are still 0%.
So actually, it's really sounding like you're not really saving anything by having a Roth. Perhaps some tax filing simplification, but you're also locking the money behind a Roth which comes with its own rule set.
You might get some advantage if your income increases by a lot in a few years, then you'll be protected against the 15% bracket. Or against potential CG/QD tax bracket changes that might increase your tax burden. But as it is today, you're not gaining anything.
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https://www.cnbc.com/2021/11/01/tax-strategy-of-the-rich-backdoor-roth-survives-in-latest-democrat-plan.html
Backdoor Roth might survive?
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https://www.cnbc.com/2021/11/01/tax-strategy-of-the-rich-backdoor-roth-survives-in-latest-democrat-plan.html
Backdoor Roth might survive?
This article is from 11/1.
It was put back in a few days after that.
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https://www.cnbc.com/2021/11/01/tax-strategy-of-the-rich-backdoor-roth-survives-in-latest-democrat-plan.html
Backdoor Roth might survive?
This article is from 11/1.
It was put back in a few days after that.
Was it? Haha. I saw the article was a couple weeks old but didn't think anything changed since then. Oh well
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https://www.cnbc.com/2021/11/01/tax-strategy-of-the-rich-backdoor-roth-survives-in-latest-democrat-plan.html
Backdoor Roth might survive?
This article is from 11/1.
It was put back in a few days after that.
Was it? Haha. I saw the article was a couple weeks old but didn't think anything changed since then. Oh well
I believe it was put back in as well.
The early versions of the bill were quite varied in the pay-for section. Now that a version has passed the full House, I expect those variations to decrease, but I personally still expect some changes in the Senate. Those should be well publicized and easier to follow though.
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Schwab's legislative expert described the changes that are heading to the Senate. The mega backdoor Roth is prohibited. The $10 million limit on IRAs is delayed a decade, so it has no effect until 2031. While unrelated to this thread, the state and local tax (SALT) exemption rises from $10k to $80k, which is likely controversial. New York and California have population based representation in the House, but only 4% of the Senate. If the legislation moves quickly, maybe the $80k SALT exemption will be dropped but the IRA and Roth changes remain.
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Schwab's legislative expert described the changes that are heading to the Senate. The mega backdoor Roth is prohibited. The $10 million limit on IRAs is delayed a decade, so it has no effect until 2031. While unrelated to this thread, the state and local tax (SALT) exemption rises from $10k to $80k, which is likely controversial. New York and California have population based representation in the House, but only 4% of the Senate. If the legislation moves quickly, maybe the $80k SALT exemption will be dropped but the IRA and Roth changes remain.
I will gladly give up the megabackdoor for this.
For FIRE chasing folks, megabackdoor is not that meaningful - if you make enough to consistently max it out, your timeline to FIRE is probably pretty short (or you are spendypants I guess) and you likely also pay more than 10k in SALT taxes as it is so the benefit there likely outweighs the cost associated with capital gains on any taxable investments you do instead of megabackdoor.
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Schwab's legislative expert described the changes that are heading to the Senate. The mega backdoor Roth is prohibited. The $10 million limit on IRAs is delayed a decade, so it has no effect until 2031. While unrelated to this thread, the state and local tax (SALT) exemption rises from $10k to $80k, which is likely controversial. New York and California have population based representation in the House, but only 4% of the Senate. If the legislation moves quickly, maybe the $80k SALT exemption will be dropped but the IRA and Roth changes remain.
I will gladly give up the megabackdoor for this.
For FIRE chasing folks, megabackdoor is not that meaningful - if you make enough to consistently max it out, your timeline to FIRE is probably pretty short (or you are spendypants I guess) and you likely also pay more than 10k in SALT taxes as it is so the benefit there likely outweighs the cost associated with capital gains on any taxable investments you do instead of megabackdoor.
By controversial, I assume the expert meant unlikely to pass. So my guess is there is no change to SALT exemption (still $10,000) and the mega backdoor Roth is also gone. There's a lot more representatives from CA + NY, who passed the bill, than there are CA + NY Senators.
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Schwab's legislative expert described the changes that are heading to the Senate. The mega backdoor Roth is prohibited. The $10 million limit on IRAs is delayed a decade, so it has no effect until 2031. While unrelated to this thread, the state and local tax (SALT) exemption rises from $10k to $80k, which is likely controversial. New York and California have population based representation in the House, but only 4% of the Senate. If the legislation moves quickly, maybe the $80k SALT exemption will be dropped but the IRA and Roth changes remain.
I will gladly give up the megabackdoor for this.
For FIRE chasing folks, megabackdoor is not that meaningful - if you make enough to consistently max it out, your timeline to FIRE is probably pretty short (or you are spendypants I guess) and you likely also pay more than 10k in SALT taxes as it is so the benefit there likely outweighs the cost associated with capital gains on any taxable investments you do instead of megabackdoor.
By controversial, I assume the expert meant unlikely to pass. So my guess is there is no change to SALT exemption (still $10,000) and the mega backdoor Roth is also gone. There's a lot more representatives from CA + NY, who passed the bill, than there are CA + NY Senators.
Whatever they change will still have to pass the house. My guess is that the SALT exemption is dropped to the 20-40k range.
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Yeah they don't have much room for error in passing this bill. No Republican will vote for it. That means every Democratic-caucusing senator needs to vote in favor, and all but a handful of Democrats from the House. Doesn't really matter that New York and California only have two senators apiece; each of those senators' votes is essential. I wouldn't be surprised to see the cap negotiated down some from $80k but that seems like something that those senators could make sure is increased at least somewhat. The backdoor Roth...I'm not sure what constituency it really has to support it, but on the other hand it has a pretty minimal impact on the bill's finances. Who can say what will happen. It's sausage factory time.
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Another clarification, the $1.75 trillion "R.A.I.S.E. Grant" has already passed the House. Now it needs to pass the Senate through budget reconciliation. The Democrats only have 50 votes, so they need everyone and a tie-breaking VP vote to pass it.
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Another clarification, the $1.75 trillion "R.A.I.S.E. Grant" has already passed the House. Now it needs to pass the Senate through budget reconciliation. The Democrats only have 50 votes, so they need everyone and a tie-breaking VP vote to pass it.
And of course, the Senate either needs to pass the House version, or any Senate changes need to go back to get another vote in the House. The latter seems more likely to me now, but I'm just a mouse in the peanut gallery.
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The Bill is dead for now, thanks to Manchin
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For now mega backdoor Roth is still alive and we dont know for how long. So I was thinking I should continue to take advantage of this as much as possible going into 2022.
So my thought is to start the year, contribute as much as employer match amount to pre tax and remaining to after tax to be converted to backdoor immediately. (My employer has certain percentage limit on our paycheck contributions towards 401k).
Later if mega back door ends in few months my limit to 401k contribution will go back to $20500(pre tax or roth) and I can continue higher than usual contributions for rest of the year.
Anyone has thoughts on this?
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It's a revenue raiser, so whenever the federal government needs to raise revenue, it will likely be on the table in some form as an option that they will consider. I doubt Congress will write a more complicated version which only ensnares backdoor Roth contributions and MBDRs and lets people with after-tax traditional IRA contributions off the hook.
One of the provisions related to this had an effective date of 12/31/2021. Since that is tomorrow, that won't happen. If I had to guess, I'd say that if the provision passes in 2022 they'll change the effective date to 12/31/2022. So IMVHO there will be one more full year to do these things.
Beyond that, I think it will depend on the political calculations going into, and then the results of, the midterm elections next fall. Which in turn will probably depend heavily on how 2022 as a year is going.
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I'd agree with blaming Senator Manchin months ago, but I would call the December fiasco a failure of the Democratic leadership. How did they underestimate Senator Manchin's demands and resolve? Why didn't they have a safe backup bill to pass through budget reconciliation?
Now we're in 2022 (Happy New Year!), and the "build back better" bill depends on avoiding the mistakes of 2021. Joe Manchin's son owns a coal plant, with many of his voters relying on coal for their jobs. If Democrats try to push anything related to green energy, they'll fail. Another pitfall is the cost. Joe Manchin quoted the CBO estimate of $4.6 trillion for the BBB bill (1), more than twice what Democrats claimed it would cost. If Democrats don't treat the CBO numbers with respect, they will fail to get the bill passed in 2022. So BBB isn't dead, but it's not looking good.
(1) "The non-partisan Congressional Budget Office determined the cost is upwards of $4.5 trillion which is more than double what the bill’s ardent supporters have claimed"
https://www.manchin.senate.gov/newsroom/press-releases/manchin-statement-on-build-back-better-act
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I'd agree with blaming Senator Manchin months ago, but I would call the December fiasco a failure of the Democratic leadership. How did they underestimate Senator Manchin's demands and resolve? Why didn't they have a safe backup bill to pass through budget reconciliation?
Now we're in 2022 (Happy New Year!), and the "build back better" bill depends on avoiding the mistakes of 2021. Joe Manchin's son owns a coal plant, with many of his voters relying on coal for their jobs. If Democrats try to push anything related to green energy, they'll fail. Another pitfall is the cost. Joe Manchin quoted the CBO estimate of $4.6 trillion for the BBB bill (1), more than twice what Democrats claimed it would cost. If Democrats don't treat the CBO numbers with respect, they will fail to get the bill passed in 2022. So BBB isn't dead, but it's not looking good.
(1) "The non-partisan Congressional Budget Office determined the cost is upwards of $4.5 trillion which is more than double what the bill’s ardent supporters have claimed"
https://www.manchin.senate.gov/newsroom/press-releases/manchin-statement-on-build-back-better-act
The country needs leadership. Democrats and Republicans keep playing these budget games with frontloaded benefits and backloaded revenue, knowing the benefits won't go away and the revenue will continue to be deferred. Someone has to stop this madness, instead of acting like six year olds and justifying bad behavior by pointing to other bad behavior. Republicans take the tactic of cutting taxes to "starve the budget" while Democrats promise all these services with token but inadequate funding mechanisms.
Nobody is willing to have an adult conversation about the need to raise taxes across the board to pay for the services already committed. Medicare payroll taxes only bring in 40% of expenses. If you want a European style social services, it requires European style payroll taxes and a sales/VAT revenue.
I'm not as upset with Manchin as I am with his former governors colleagues with (Ds) after their name like Hassan, Warner, and Hickenlooper who know better than to continue this madness. They're letting their counterpart take all the bullets because he's primary proof.
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Started my 2022 Backdoor Roth today. I figure even if/when it passes, it won't be retroactive.
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i'm going to try my first backdoor Roth for 2021 prior to April filing date and also do a 2022 backdoor with the hopes of any changes in the law will not be retroactive.
1. I used to do direct Roth contributions until my income increased in 2021. i have been and continuing mega back door contributions for 2022, capped at 10% by employer so $ amount isn't an issue.
2. I don't currently have a traditional IRA
My plan is to open an IRA account, contribute a 2021 non deductible amount and not invest in anything, just leave as cash. I then roll it over to my Roth.I'll repeat the process again for 2022. Is there anything i'm missing for pitfalls?
The trad IRA doesn't have to be invested correct? i'm only going to have a cash balance for a day before rolling it over.
Is there any issues for having the initial contribution to the trad IRA and the rollover be done in such a short period of time?
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@joe7886:
Pitfalls - if you do invest inside the traditional IRA, the amount you convert to the Roth may be a bit higher or lower than your original contribution. I forget how this is handled tax-wise, but there are some minor tax consequences.
The traditional IRA doesn't have to be invested. Note that depending on your IRA custodian, they may sweep your contribution into a money market settlement fund, which usually pays some interest. Depending on your contribution amount, how long you leave the money there and what the interest rate is, you may end up getting paid a couple of pennies in interest. Which will result in the aforementioned minor tax consequences.
Are there any issues with a quick backdoor Roth? Some people think so - I think the argument is that you're, in a way and based on the step transaction doctrine, violating the Roth contribution AGI limit. Because the loophole has been widely known for years and I have never heard of someone actually getting in trouble with the IRS for doing it, I don't personally agree with that viewpoint.
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Are there any issues with a quick backdoor Roth? Some people think so - I think the argument is that you're, in a way and based on the step transaction doctrine, violating the Roth contribution AGI limit. Because the loophole has been widely known for years and I have never heard of someone actually getting in trouble with the IRS for doing it, I don't personally agree with that viewpoint.
It's fine. There were a couple clarifications of its legitimacy in 2018.
https://www.forbes.com/sites/ashleaebeling/2018/01/22/congress-blesses-roth-iras-for-everyone-even-the-well-paid/?sh=7f0317374715
https://www.forbes.com/sites/jeffreylevine/2018/07/13/irs-unlocks-the-door-for-high-income-savers/?sh=229eb1ca326c
Pitfalls - if you do invest inside the traditional IRA, the amount you convert to the Roth may be a bit higher or lower than your original contribution. I forget how this is handled tax-wise, but there are some minor tax consequences.
The traditional IRA doesn't have to be invested. Note that depending on your IRA custodian, they may sweep your contribution into a money market settlement fund, which usually pays some interest. Depending on your contribution amount, how long you leave the money there and what the interest rate is, you may end up getting paid a couple of pennies in interest. Which will result in the aforementioned minor tax consequences.
Pennies don't matter.
If it becomes a dollar or more, you'll owe a small amount of tax. It works out just fine.
https://www.whitecoatinvestor.com/pennies-and-the-backdoor-roth-ira/
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Sounds like you have a good handle on it. You could also contribute both 2021 and 2022 and then convert them both at the same time, no need to do separate conversions as the conversion is reported on Form 8606 in the year you make it (2022) not the year the contribution was for (2021 and 2022).
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I'm not as upset with Manchin as ... They're letting their counterpart take all the bullets because he's primary proof.
Looking at wikipedia's summary of his past elections, you're right about that. I assumed a Democrat in a heavily Republican state would need independent voters, but I guess not.
There's an attempt now to create a smaller bill to replace BBB. That could include Roth provisions while catering to areas Manchin will support... or they might make the same mistakes as last year. The saga continues... until the end of 2022, when Republicans will very likely take control of the Senate and end any attempts to pass BBB.
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thanks
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Sounds like you have a good handle on it. You could also contribute both 2021 and 2022 and then convert them both at the same time, no need to do separate conversions as the conversion is reported on Form 8606 in the year you make it (2022) not the year the contribution was for (2021 and 2022).
There's another wrinkle. I'm still partially qualified for a direct Roth contribution due to income, let's say it's 1,000. Do i have to do a direct contribution for the 1,000 and the remainder through the conversion? It's not an issue for 2021 but i won't know what i qualify for in 2022. I'd prefer to just put it in in the trad IRA and then convert it all.
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Sounds like you have a good handle on it. You could also contribute both 2021 and 2022 and then convert them both at the same time, no need to do separate conversions as the conversion is reported on Form 8606 in the year you make it (2022) not the year the contribution was for (2021 and 2022).
There's another wrinkle. I'm still partially qualified for a direct Roth contribution due to income, let's say it's 1,000. Do i have to do a direct contribution for the 1,000 and the remainder through the conversion? It's not an issue for 2021 but i won't know what i qualify for in 2022. I'd prefer to just put it in in the trad IRA and then convert it all.
No need to split it up, you can do the full amount as an after tax traditional contribution followed by conversion at any income level.
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Thanks
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So have everyone continued with MBR into 2022? I was meeting with a financial advisor at the end of 2021, and his suggestion was to hold off. I asked him in January after it was clear that BBB had stalled, and he said his advice was still to hold on it. For various reasons, I'd prefer not to keep plowing money into my taxable account... but I am somewhat concerned about MBR/conversion changes being made retroactive.
Any thoughts on the likelihood of this, and if so, the ramifications had someone already made conversions? Thanks!
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So have everyone continued with MBR into 2022? I was meeting with a financial advisor at the end of 2021, and his suggestion was to hold off. I asked him in January after it was clear that BBB had stalled, and he said his advice was still to hold on it. For various reasons, I'd prefer not to keep plowing money into my taxable account... but I am somewhat concerned about MBR/conversion changes being made retroactive.
Any thoughts on the likelihood of this, and if so, the ramifications had someone already made conversions? Thanks!
My opinion FWIW:
1. I doubt this provision will pass in 2022.
2. In the unlikely scenario where this provision passes in 2022, I doubt they will make it retroactive simply because to do so would create a nightmare for people who had already done backdoor Roths or MBRs. It's also not a very big revenue generator, so the impetus to make it retroactive isn't very high.
So overall I think the chances of it being an issue are quite low.
If I were concerned, I might wait until later in 2022 or even early 2023 to take action. This would work OK with the backdoor Roth; with the MBR option you'd have to decide if you're OK with the contributions just sitting there in the after-tax segment of your 401(k) if the MBR is retroactively eliminated. Offhand it would seem to me that after-tax 401(k) contributions are generally better than taxable unless the fees or investment options are really bad.
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I did backdoor Roths for my wife and I immediately at the beginning of the year, and am continuing on with mega backdoor as usual. I find it highly doubtful any changes would be retroactive.
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We have also been plowing money into my wife's MBR in 2022. Assuming this will be the last year it is allowed, so want to max it out one last time!
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We have also been plowing money into my wife's MBR in 2022. Assuming this will be the last year it is allowed, so want to max it out one last time!
We will start with this week's paycheck and bring home zero until DH leaves megacorp, as we expect this to be the last time we have it available, no matter what happens legislatively.
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We have also been plowing money into my wife's MBR in 2022. Assuming this will be the last year it is allowed, so want to max it out one last time!
We will start with this week's paycheck and bring home zero until DH leaves megacorp, as we expect this to be the last time we have it available, no matter what happens legislatively.
Do you usually contribute the max so that the take home pay is zero? Or just because he is leaving the company soon? Either way, very impressive!
Last year my calculations were slightly off for the first MBD contribution so DW's first paycheck was $0. She took it well and likes to give me a hard time about it now, lol. But we usually aim for ~$300 take home pay for her biweekly paychecks.
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We have also been plowing money into my wife's MBR in 2022. Assuming this will be the last year it is allowed, so want to max it out one last time!
We will start with this week's paycheck and bring home zero until DH leaves megacorp, as we expect this to be the last time we have it available, no matter what happens legislatively.
Do you usually contribute the max so that the take home pay is zero? Or just because he is leaving the company soon? Either way, very impressive!
Last year my calculations were slightly off for the first MBD contribution so DW's first paycheck was $0. She took it well and likes to give me a hard time about it now, lol. But we usually aim for ~$300 take home pay for her biweekly paychecks.
We usually don't have enough take home pay to cover expenses while contributing, but this will be the first time we go down to zero. In 2021, we took a break between deferrals and after tax contributions, in order to replenish the coffers for a big vacation. Just depends what else we have going on, but this year he insists he wants the MBR, even if it means we sell some equities to make it through.
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
Make less money? :D
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
Make less money? :D
Coast FIRE part time job that you enjoy?
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
Make less money? :D
Ha, that's always been my "strategy". There's only one downside.
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
You can do the regular backdoor, but only $6k a year (or whatever the max IRA contribution is). You just contribute post-tax money into a regular IRA, then convert it to Roth.
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Without mega backdoor, are there any other workarounds to toss money into Roth IRA?
You can do the regular backdoor, but only $6k a year (or whatever the max IRA contribution is). You just contribute post-tax money into a regular IRA, then convert it to Roth.
It has been a bit since I looked, but IIRC the proposed law that would eliminate MBR also would eliminate regular backdoor Roths.
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This quote from Biden makes no sense: "I think we can break the package up"
https://www.eenews.net/articles/biden-resets-bbb-i-think-we-can-break-the-package-up/
Maybe some of my assumptions are wrong:
(1) Only one bill per year can be passed through budget reconciliation
(2) With budget reconciliation, a 50/50 split allows the Vice President to break the tie
(3) All other bills are up against a filibuster, needing 60 votes when 50 Republicans will vote against it
If they break it up, one bill could pass through reconciliation while the rest will be blocked by filibuster. Midterms often favor the party out of power (Republicans), and Biden's popularity has weakened in his first year. Everything points to Democrats losing seats in the Senate, after which they can't even pass anything through reconciliation.
The most pressing issue is climate change, but any climate bill is dead on arrival. Machin earns more from his son's coal company than from his government salary. He's going to keep objecting, and that objection prevents reconciliation.
So they can't even get their biggest priority through. I don't think BBB will be passed, and at best some fraction of it might get through in a much smaller bill. Which also means I think the IRA provisions will be dramatically different than the original BBB bill.
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This quote from Biden makes no sense: "I think we can break the package up"
https://www.eenews.net/articles/biden-resets-bbb-i-think-we-can-break-the-package-up/
Maybe some of my assumptions are wrong:
(1) Only one bill per year can be passed through budget reconciliation
(2) With budget reconciliation, a 50/50 split allows the Vice President to break the tie
(3) All other bills are up against a filibuster, needing 60 votes when 50 Republicans will vote against it
If they break it up, one bill could pass through reconciliation while the rest will be blocked by filibuster. Midterms often favor the party out of power (Republicans), and Biden's popularity has weakened in his first year. Everything points to Democrats losing seats in the Senate, after which they can't even pass anything through reconciliation.
The most pressing issue is climate change, but any climate bill is dead on arrival. Machin earns more from his son's coal company than from his government salary. He's going to keep objecting, and that objection prevents reconciliation.
So they can't even get their biggest priority through. I don't think BBB will be passed, and at best some fraction of it might get through in a much smaller bill. Which also means I think the IRA provisions will be dramatically different than the original BBB bill.
Thanks for the update! Regardless of how everyone in this thread feels about BBB overall, I think most of us will be pretty happy that it seems unlikely the IRA provisions will pass. DW and I don't make nearly enough to have to worry about the regular backdoor roth, but maxing out the MBD roth the last 2 years has been pretty awesome in regards to setting us up well for early retirement.