Last Chance For Mega-Backdoor Roth IRA Contributions

By: David M. Foster, CFP®, CAP®

There are relatively few truly pressing concerns when it comes to financial planning. The difference in impact between implementing a strategy today versus six months from now will rarely be a significant one. However, the topic of this blog post is the exception to that rule.

What is a Backdoor Roth IRA Contribution?

A backdoor Roth IRA contribution is what it’s called when someone who makes too much money to contribute directly to a Roth IRA ($140,000 for single filers and $208,000 for married couples filing jointly) makes a non-deductible traditional IRA contribution and then converts that contribution to a Roth IRA before the funds have had a chance to grow much or at all, thereby funneling the money into the Roth IRA without having to pay much or anything in taxes to do so.

What is a Mega-Backdoor Roth IRA Contribution?

A mega-backdoor Roth IRA contribution is, essentially, the same thing, but accomplished via after-tax contributions in an employer sponsored retirement plan. Even if you don’t make too much to contribute to a Roth IRA, if you have any after-tax dollars in any employer sponsored retirement plan, either with a current or former employer, you may be able to roll those after-tax contributions over into a Roth IRA, tax free.

Can you explain that again, in English this time?

If the last two paragraphs sounded like gobbledygook to you, just know that Roth conversions of after-tax contributions to retirement plans can be a tremendous way to reduce your future taxes in retirement.

The End Of The Backdoor Roth IRA

Now, to the reason for this this post. As part of the Democrats’ House Ways and Means proposal, these types of Roth IRA conversions will not be allowed starting in 2022. Of course, this bill isn’t law yet (as of 10/25/2021 when I’m writing this), and the details could certainly change between now and the end of the year.

Still, if you’ve been procrastinating on completing a Roth conversion on after-tax contributions, or if you didn’t even know you could do so before reading this, make sure to investigate completing those conversions before the end of the year!

Of course, if you have any questions about whether this applies to and/or makes sense for you, don’t hesitate to click here to schedule an appointment with me to discuss your situation. Thanks for reading!

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