Congress May End Roth IRA Conversions. What Can You Do?

  • A few popular retirement techniques may disappear with the Build Back Better Act
  • You may want to take action now with your accountant before December 31st
  • The bill is still in limbo – nothing is final yet 
IRA Conversions Congress

It seems a few popular retirement tax strategies may soon be ending if Congress has anything to say about it. 

In today’s blog, we’re going to discuss the Roth IRA conversions, why they are in the news, and what you can do now to prepare for the impending changes. 

Let’s dive in. 

Congress IRA Conversions

What’s Going On? The Quick Version

Unless you’ve been hiding under a rock, you’re probably aware of the back-and-forth negotiations of the Build Back Better Act in Congress. 

While the Act has a number of proposed tax reforms, there are two provisions that will heavily impact retirement planning that we’re going to talk about today. 

In a bid to fund the $3.5 trillion budget Build Back Better Act, House Democrats have proposed ending the pre-tax and post-tax conversions to a Roth IRA, which have been allowed since 2010. 

If the bill continues as is, after-tax IRA and after-tax 401(k) plan conversions will cease at the end of this year, Dec. 31, 2021. 

Pre-tax conversions will still be allowed. However, they too will end in 2032 for anyone making more than $400,000, or $450,000 for married couples filing together.

Here are the cliff notes: 

  • If you currently convert post-tax traditional IRA contributions to a Roth IRA (i.e. you use a Backdoor Roth IRA strategy), you won’t be able to after December 31, 2021. 
  • You will still be able to make pre-tax conversions to a Roth IRA.
  • However, if you make over $400,000, or $450,000 married filing jointly, you won’t be able to do that either after December 31, 3031.


Let’s Dive Deeper. What is The ‘Backdoor’ Roth IRA?

In order to interpret the impending changes, it’s important to first understand the law as it stands today.

As of 1998, middle-class Americans have been able to contribute up to $6,000 ($7,000 for ages over 60) each year to a tax-free retirement account known as a Roth IRA.

Unlike traditional retirement accounts, a Roth IRA allows you to withdraw the money at any time after turning 59 ½ years old, without having to pay federal taxes.

However, limitations have always applied.

For example, individuals earning more than $140,000 in 2021 – or $208,000 if married filing jointly – are prohibited from contributing, as their income is deemed too high.

This is where the backdoor Roth IRA comes in.

Since 2010, accountants have been able to legally “convert” traditional IRA funds to a Roth IRA in order to help higher income earners take advantage of the tax benefits of a Roth IRA.

This has often been referred to as a ‘back-door Roth’, as it went around the income limits to get money into a Roth.

It’s essentially a loophole. Or it was.

Moving forward, the new bill will essentially end the back-door Roth IRA by disallowing any after-tax contributions to be converted or rolled into Roth accounts or Roth IRAs.

The provision will kick in for the tax year 2022, so if passed, you still have until the end of this year to convert after-tax contributions into a Roth IRA.

It is important to acknowledge that the bill will not end all conversions as tax-deferred dollars can still be converted to a Roth IRA.

What About Pre-Tax Conversions?

As mentioned, the majority of people will still be able to make some conversions to a Roth IRA, as long as they are tax-deferred dollars. These are called pre-tax conversions. 

However, beginning in 2032, the new bill will stop conversions of any kind for anyone earning above $400,000 for single filers and $450,000 for married filing jointly.

Take Away: If you make over $400,000, you have ten more years to take advantage of pre-tax conversions.

What Can You Do Now? 

While we wait for negotiations to finalize in Washington, there are several actions you can take now to prepare for life without after-tax conversions in 2022. 

Firstly, if you make over $140,000 in income this year, we recommend making the maximum backdoor Roth IRA contribution for 2021. The bill will not affect any conversions made this year. 

Speak with your accountant now to avoid any delays before the end-of-year deadline. 

Additionally, it’s a good time to sit down and discuss additional ways for your money to grow tax-free.

Options such as the Health Savings Account can help achieve similar outcomes, with the ability to withdraw tax-free funds after the age of 65. 

Keep an eye out for our future blog post where we’ll discuss this option in more detail. 

For now, it’s important to note that there are still a lot of nuances in the proposed bill to play out. 

If you’re a U-Nique Accounting client, you can rest easy knowing that we’ll be watching the negotiations closely in order to prepare our clients as quickly as we can. 

If you have a question about the impact of the impending changes, or simply a question in general, you can reach out to us anytime here, or or book a quick 15-minute call over on our Contact Page.

Until next time!

Matt C


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