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The One Thing You Can Safely Do Now Ahead of Biden’s New Tax Bill

By Paul J. Carroll, CFP®September 30, 2021November 28th, 2023Videos


The backdoor Roth. It’s a great technique for getting after tax dollars into a Roth IRA if you don’t otherwise qualify. That deal might be a goner by the end of the year. What can you do? Is there anything that’s risk-free, meaning even if they don’t pass the bill as it stands – it’s no harm, no foul. Well, there is, and we’ll talk about it.

So, there’s something called a Roth two-step, we call it that, also the backdoor Roth and the way the mechanics work because you make a deposit of after-tax dollars into a traditional IRA. You don’t get a deduction and you move those dollars shortly thereafter into a Roth. In the early years, we weren’t sure how the IRS would like this, but they never challenged it and eventually came up with a ruling, saying, yes, this is legal.

It’s been quite the loophole because there’s no income limit on after tax contributions. The latest Biden tax bill is looking hard at closing that. It’s not that big a deal. I mean, if you’re talking $7,500 a year, who cares? But there is something called the mega backdoor Roth or the mega Roth two-step. And that is taking after tax 401k contributions and rolling those on the rollout to a Roth IRA. In some cases, this can be tens, maybe even hundreds of thousands of dollars. That’s why we call it the mega backdoor Roth. That one’s going to be a painful one to lose. When I talk about how not to… And finally, there is discussion about eliminating all Roth conversions. Interestingly enough, that doesn’t happen until January 1st, 2032. Ten years out.

Why? Well, the problem with the traditional conversion from a budgeting point of view is it’s more tax revenue now. So, to make the numbers add up, they had to make the effective date of that rule 10 years out so it didn’t affect the ten year funding math, not the first time that game has been pulled. And so, it’s anybody’s guess as to whether or not it will really happen. So how do you protect yourself from the mega Roth closure. You’re working, you don’t want to quit working. That’s kind of a high price to pay to get a nice mega Roth conversion. After tax dollars can be moved into Roth contributions at a 401k if your provider allows it. But you may not want to go that way because many providers, including the major airlines, don’t separate Roth dollars from traditional dollars when you’re investing. And the problem with that is it makes tax efficient investing difficult.

We call that tax location. We put tax ugly investments in the traditional device, the traditional IRA, the traditional 401k, and we put high growth investments in the Roth side of the fence. We can get into the why at a later date, later conversation. But the only way to get around that if you’re provider doesn’t allow more accurate account tracking is to do what’s called an in-service distribution to a rollover IRA and a rollover Roth. In fact, you should be allowed to, again, if your plan permits it, just rollover the after-tax contributions. So set up a Roth IRA and send those rollover dollars to that Roth IRA, get them out of the plan. How old do you have to be to do this without penalty? 55. Should you do it before 55? It’s not worth the penalty. Not at all. But you don’t have to quit.

Almost all plans will allow some form of this strategy. Now this is first of a series of videos we’re going to cut on the proposed tax changes. Why this one first? Because this is a no harm, no foul maneuver. You can do it, and if it turned out to be unnecessary, it doesn’t matter. But if it turned out to be necessary and you waited past January 1st this year, those funds will not be able to be rolled into a Roth. And that would be a terrible loss for the future growth of your wealth. We wish you the best of investing success. Thank you.

Paul J Carroll
Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.