Update as of December 20, 2021: I originally posted this article on Saturday morning, December 18th. On Sunday, developments occurred which called into question the use of a question mark in the article’s title.
Senator Joe Manchin appeared on Fox News Sunday and very publicly indicated he is a No on Build Back Better. He followed that with a written statement outlining his opposition to Build Back Better. The White House issued a statement in response to Senator Manchin.
A fair assessment indicates the parties are not at all close on this one. This is not a situation where Senator Manchin is bargaining to get A, B, and C into the bill and the White House is hoping to only have to give B and C. While anything is possible with tax legislation, it is quite difficult to argue that the Build Back Better program (which includes Backdoor Roth IRA repeal) has a realistic possibility of passage in this Congress in anything resembling its current form.
Below is the original post posted on December 18, 2021.
There’s an early Christmas present for tax efficient investors. The proposal to end the Backdoor Roth IRA is on life support, and as of now (December 18, 2021) it appears that even if the proposal passes, it will not pass until 2022 at the earliest.
Latest Developments
The White House has now issued a written statement that the so-called Build Back Better program will not be signed into law this year. The proposal to repeal the Backdoor Roth IRA is one of many tax proposals contained within the overall Build Back Better legislative program. As this Deloitte write-up discusses, it is clear the Senate will not pass the legislation any time in the near-term. Thus, for the time being, the Backdoor Roth IRA is in the clear.
Prospects for 2022
Update December 28, 2021: Read my assessment of 2022 Backdoor Roth IRAs.
There is a reason the Build Back Better program will not be enacted during 2021: it’s not broadly popular. This is reflected in the current opposition of all 50 Senate Republicans and Democrat Senator Joe Manchin. Further, it is not at all clear that Democrat Senator Kyrsten Sinema will ultimately support Build Back Better.
If the Build Back Better program were to become popular, the dynamics in the U.S. Senate would likely change. But one must ask: is there something that could occur in early 2022 that would make the legislation popular then when it was not popular in late 2021?
Another issue the legislation has is the unlikelihood of any potential tax increase passing during an election year. New tax laws have proponents and opponents: in recent years Congress has hesitated to create opponents during election years by enacting significant tax legislation.
What If?
What if the legislation is enacted in early 2022? What happens to Backdoor Roth IRAs? That is highly, highly speculative. My guess is that if the legislation (at that point) bans Backdoor Roth IRAs, either (i) Backdoor Roth IRAs will be prohibited as of January 1, 2023 (instead of January 1, 2022 in the current legislation) or (ii) prohibited as of the enactment of the law.
But all sorts of alternative possibilities exist. A much smaller version of the Build Back Better program could be enacted, and that version could omit the Backdoor Roth IRA repeal. Or there will be no legislation enacted at all.
Why Are We Here?
Is the Backdoor Roth IRA gimmicky? Absolutely it is!
But there is a bigger issue. Why the heck is there any income limitation on the ability to make a $6,000 annual contribution to a Roth IRA? Consider these two examples.
Wealthy Investor controls a large public company and is known for his ability to earn good investment returns. He is worth billions of dollars and is 80 years old. He can direct the large public company to offer a Roth 401(k), and on January 1st of 2022 he can have payroll issued to him, of which he can put $27,000 into his Roth 401(k).
Single Nurse, age 35, is a nurse and earns $170,000 from her W-2 job. Her employer offers a traditional 401(k) but no Roth 401(k). Single Nurse earns too much (due to the Roth IRA modified adjusted gross income limit) to make an annual $6,000 contribution to a Roth IRA. As a result, Single Nurse’s annual Roth contributions are limited to $0.
Wealthy Investor can contribute $27,000 to a Roth 401(k) but Single Nurse can’t contribute $6,000 to a Roth IRA?
To borrow an exasperated quote from Cosmo Kramer, “What’s going on!!!”
The Backdoor Roth IRA solves this problem for Single Nurse and many other Americans. This workaround does not work for all Americans, as I have previously written.
The simplest solution is to eliminate the modified adjusted gross income limit for all Roth IRA contributions. So some very wealthy Americans will get a few thousand dollars into Roth IRAs every year. Is this a horribly worrisome outcome considering many very wealthy Americans already have access to much greater workplace retirement plan contributions with absolutely no income limitation?
Once the income limit on the ability to make a Roth IRA contribution is repealed, there will be no need for Backdoor Roth IRAs.
Conclusion
The only constant in the tax world is change. We shall see what the future holds for the Backdoor Roth IRA, but the coast appears to be clear for the rest of the year. Stay tuned!
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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.
is it possible that congress will pass the BBB in 2022, but prohibiting Backdoor Roth retroactive to 1 jan 2022?
If so, what happens incase someone has done a Backdoor the first week of Jan?
Hussein, thank you for reading and commenting. Right now it is far too unknown to comment on what would happen in that case, though one must wonder if a retroactive tax law change would be valid (as applied retroactively).
Thanks for this post (well, thanks for all your posts). I’ve been trying to keep track, as my wife makes after-tax 401K contributions and then moves to Roth, and wasn’t sure whether to stop them or not for 2022. I think we’ll keep with it.
Hi Sean,
I’m considering going ahead and completing my backdoor Roth for 2022 when January rolls around, doing so under the assumption that a retroactively applied legislation is unlikely even if passed. Do you think it would be wiser to wait until later in the year, or see any strong risk in completing it in the near term? I’d completely understand if you’d prefer not to speculate on this point.
Thanks so much again for your coverage and thoughts on this topic. Merry Christmas!
Andrew
I’m with you on that. We desperately do need infrastructure spending but this ain’t that.
Andrew, thank you for reading and commenting.
I cannot comment on any particular taxpayer’s situation on the blog.
Good article, but the bill is in fact broadly popular with 70% of Americans supporting it and only obstructionist Republicans and attention seeking Dems are against it.
Mike, I think your info may be out of date. Recently Americans haven’t been so supportive of BBB. Depending on the specific poll it only has 41-47% in support, with 34-40% opposed, with the remainder undecided. I had been in support of the bill but deluding ourselves about its popularity helps no one.
Source: https://fivethirtyeight.com/features/americans-like-whats-in-the-build-back-better-act-theyre-lukewarm-on-the-bill-itself/
Im really hoping the backdoor roth clause is taken out of the bill whenever the new bill is put together in 2022. As a married first responder in California, I use the backdoor roth in order to put money in my Roth IRA as the income requirement makes me ineligible to directly put $6000 in there. Like you said, I feel like they should either get rid of the income levels or adjust the current income levels to contribute into ROTH IRA
I wholeheartedly agree. A person making 125K in California is far from wealthy. Heck if you make any less than that you will be hard pressed to fund any kind of IRA after the cost of living.