Is the ‘backdoor’ Roth dead?

This Q&A is devoted to your questions about Roth IRAs and other retirement planning options. Send me your questions by going to jillonmoney.com and clicking “Contact Us.”

Q: I have been doing backdoor Roth conversions for the past five years, but I am hearing that Congress may not allow them anymore. Can you please explain?

A: Let’s start with a little background. With a Roth retirement account, you do not take any tax deduction today. But like other retirement accounts, there is no current taxation on earnings or capital gains on trades made in the account. When you access and withdraw the funds after age 59

½, there is no tax due. Additionally, Roth IRAs are not subject to Required Minimum Distributions (RMDs).

Currently, you can only use a Roth IRA if you earn below a certain amount of money. (Roth 401 (k)s and 403 (b)s do not have any income limitations.) However, if you make over the 2022 threshold amount ($204,000 to $214,000 married filing jointly and $129,000 to $144,000 for single filers), you can make a $6,000 ($7,000 if over age 50) contribution into a nondeductible IRA account and then convert it to a Roth IRA. The process has been called the “backdoor” into the Roth universe for higher earners.

The Build Back Better legislation that Congress has been contemplating would eliminate the ability to do a backdoor conversion, which has caused many to wonder whether they should proceed with their annual contributions. While it is possible that the legislation would be retroactive to Jan. 1, 2022, as we get deeper into the year it seems more likely that if the bill were to pass, it would become effective as of Jan. 1, 2023.

To be conservative, it may make sense to wait a few more months to see what happens.

I have also been fielding questions about Roth accounts in general — and whether BBB is just the first step toward eliminating all tax benefits associated with the Roth status.

While one can never be 100% sure about future legislation, IRA expert Ed Slott reminded me that Congress likes the Roth because it brings in tax revenue today, rather than having to wait for it from folks who pull from their accounts in the future. Until we hear otherwise, I remain a big fan of the Roth and encourage people to consider it as one of the few ways to control future tax liability.

Q: I’m a single 28-year-old engineer and work for a startup that doesn’t offer a 401 (k). I now contribute $6,000 to a Roth but want to save even more. What else should I do to save for retirement? A:

A plain old taxable brokerage account is your answer. Although you didn’t say how much you make now, I assume that because you are contributing to a Roth, you are under the limit, which means that your tax bracket is historically low. I would argue that given your earnings capacity and the potential for higher tax rates in the future, you would be well served to pay the taxes now, and then invest the money in a tax-efficient index fund that does not throw off too much income.

Q: I have been converting my traditional IRA into a ROTH in the years before I’ll need to begin taking RMDs. Does it make sense to continue to convert and pay the taxes now, before I have the added income that will come from those RMDs? Doing so will eat into my cash on hand. A:

Presuming you leave yourself with one year of living expenses on hand, I would continue with the conversions.