Congress is about to kill this popular retirement tax move

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If you were planning on doing a “Roth IRA” conversion to keep your retirement savings permanently out of the hands of the IRS, you might want to get one.

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The new tax bill on Capitol Hill is going to eliminate these conversions for everyone after the end of the year—and, no, not just those who make more than $400,000 a year.

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The bill “restricts all employees’ after-tax contributions to qualified plans and prevents after-tax IRA contributions regardless of income level from being converted to Roths, distributions, transfers, and contributions made after December 31, 2021.” effective for.” reports House Ways and Means Committee.

This section is in addition to separate steps being taken to crack down on IRAs and Roth IRAs for millionaires, billionaires, and those earning more than $400,000 annually.

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President Joe Biden promised in his successful election campaign that he would not raise taxes on people who make less than $400,000 a year (or $450,000 a year if married and file joint returns). Technically you could argue that this change still fulfills the promise, as it is not an imposition of tax; This is … er … the end of the tax break.

Incidentally, the Bill also separately eliminates a practice known as “”.back door roth“Which was allowing higher earners to get around the income limit for IRA contributions.

David Bussolota, a trust and estate partner at Connecticut law firm Pullman & Comley, says the bill’s general theme when it comes to retirement planning is to attempt to address loopholes used by high earners. However, he says, it seems that the law may also close some loopholes for those—unintentionally or not—who are on more middle-class incomes. The end of Roth conversions is one example, he says.

There are two types of IRAs: Traditional and Roth. In a traditional IRA, you contribute with tax-free dollars — you can deduct contributions from your taxable income for the year — but you have to pay taxes when the money goes out. In a Roth, it’s the other way around: You contribute using tax dollars, but the money that goes out is completely tax-free. The maximum IRA contribution is $6,000 per person per year, plus another $1,000 per year if you are 50 or older.

Until now, people holding money in a traditional IRA could convert them to a Roth if they paid taxes. So if, say, you deposited $50,000 in a traditional IRA, you can add $50,000 to your taxable income for that year, pay income tax on it, and convert it to a Roth. There will be no more taxes to be paid in future.

This move by Congress, if it lives up to the bill, will have big implications. This means they would effectively eliminate the IRA tax break for most people if single (or about $208,000 if married and filing jointly) earn more than $140,000.

In any year you hit those limits, you won’t be able to get any tax breaks on the IRA. You’ll earn a lot more than you would pay in a traditional IRA. You will earn too much to pay in a Roth IRA. And now you won’t have a third option, which is paying into a so-called non-deductible traditional IRA, an IRA with no tax breaks going in or coming out, and then doing a Roth conversion right away. – “Backdoor Roth.”

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There are wrinkles and caveats, as is always the case with the US Tax Code. Key one: If you exceed these income limits, but neither you nor your spouse is covered by a 401(k) or other retirement plan at work, you can still claim a tax break on your IRA contributions. will be eligible for

So far it doesn’t seem like lawmakers are going after Roth 401(k) plans, where you contribute to your company’s retirement plan using after-tax dollars and avoid future taxes. stay tuned.

Should you make that conversion in a hurry for as long as you can? Perhaps. Everyone’s tax situation is different, and many people may find it worth it.

I’ve never been a big fan of Roth IRAs and Roth conversions as conventional wisdom in the financial planning business. Yes, well, a Roth has some advantages over a traditional IRA. For example, the IRS doesn’t require you to take taxable distributions from a Roth IRA after age 72, which it does with a traditional IRA.

But, overall, I’ve always thought that while I’m working, I’m probably going to pay a much lower income tax rate in retirement. So why would I want to pay a higher tax rate upfront so that I can avoid paying a lower rate in a few decades’ time?

Plus, I’ve always assumed that job 1 of my retirement savings isn’t to make me rich (that’s job 2) but to make sure I’m not poor. With a traditional IRA, you don’t pay taxes on the money that goes in — and you pay little or no tax on the money that comes out if you’re in serious trouble in your golden years. How stupid would I feel if I voluntarily agreed to pay more income tax today, and when I turn 80?

It may sound crazy, but there’s another reason I’m wary of Roth IRAs: I don’t trust politicians. of any stripe. (You could say I don’t trust voters.) I could have paid taxes in advance hoping to get my money tax-free in 30 years’ time, only to find that the second owed me. Bar tax is being levied, well, the government needs my money.

Naturally it would say no to that malicious double taxation. It will call it “cracking down” on the “empty way”.

At least with my 401(k) and any traditional IRA money, I can’t be taxed twice because I haven’t been taxed once yet.

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