Kevin Michels, CFP®, EA
Last year, President Biden introduced the Build Back Better Plan, a gigantic investment in COVID-19 relief, social services, welfare, infrastructure, and climate change. To pay for the plan, many tax law changes were proposed to increase tax revenue. One of which was to do away with the ‘backdoor Roth IRA contribution’ strategy. A backdoor Roth IRA contribution (BDR for short) is a way for high earners to get around the income limit that restricts them from contributing directly to a Roth IRA. As we know, the Build Back Better plan was not passed into law and the BDR lives on!
We’re recommending clients get their BDRs done as soon as possible for two reasons:
1) President Biden is still fighting to revive the Build Back Better Plan, and recently announced he plans on splitting up the agenda into smaller parts to “get as much as he can now and come back and fight for the rest later”. There’s a chance that a portion of the bill could be passed, and we could see BDRs get the ax. If that happens, we’re pretty sure the changes won’t be backdated to the beginning of 2022 but will take effect either when the bill passes or starting in 2023. One reason why the changes wouldn’t be backdated is because in 2020 when congress passed the SECURE Act, they did away with re-characterizations of Roth conversions which is the only way you can “undo” a BDR.
2) The stock market is down about 10% from its most recent high on January 3. Contributing to retirement and investment accounts when the market takes a dip is generally a good strategy, but it becomes even better when you can contribute to a tax-free account like a Roth IRA and the eventual rebound is tax-free.
We’ll be reaching out to all our clients who traditionally do BDRs. In the meantime, reach out with any questions!