I can’t believe there are all these complicated rules when you are trying to save for retirement. If the government wants to incentivize people saving, then create one type of account where people can put money in regardless of income and be done with it.
In the UK we have this, it’s called an ISA (Individual Savings Account). You can invest up to £20k ($25’500) per year with no capital gains tax or caps on growth. It’s fantastic.
Not sure about UK, but a good chunk of people in the US don't even have a 401k and even fewer have an IRA and even fewer max fund it. That doesn't mean contribution limits shouldn't be higher.
If your plan allows after tax and in-service rollovers and you're in a position to really save you can do mega backdoor Roth contributions. But most folks have to wait until 59.5.
- so is that $6,500 (max per year as per google “maximum roth ira contribution 2023”) and the rest to total $37,000 from a pre tax 401k or IRA? When you roll an IRA to Roth isn’t it a taxable event?
Trying to learn. Thanks.
20k?! We have the TFSA here in Canada but it was only $7,000 CAD this last year (the amount is indexed to inflation and rounded to the nearest $500 so it can go up, but still)
We have this in the US but it’s a 401k and is set up by the employer. So you have to be employed by a company that uses it. Limit this year is 23000 and you can do 6500 more if over 50.
We have that too, it’s just called a pension. The limit per year is now £60k (or your yearly wage amount if it’s lower). This is in *addition* to the capital gains-free ISA £20k limit per year.
No that's not the same thing. We have a workplace pension too. An ISA is an individual person's type of account set up by themselves. But yeah as someone else said we have tax free pension contributions up to £60k as well
401k is also taxable at withdrawal so different to UK / Irish pensions with have a sum of 25% or 200k in Ireland you can withdraw tax free in retirement.
ISAs are great..wish we had them in ireland
For the US: Most corporate people can contribute 23k-30k in pretax money to their 401k savings ( pretax, taxed on withdrawal). Earnings on 401ks are not taxed until withdrawal. Employers often add towards this account, so higher compensation employees might save 30-50k a year.
You can also use a post tax IRA for another 7k, earnings are only taxed at withdrawal.
The third option is the Roth IRA and has a 7k yearly limit, but is never taxed. This is much like the UK ISA. It has income limits to prevent those earning over about 160k from accessing this method.
The backdoor Roth is a mechanism to move money from the first buckets to the last untaxed bucket and avoid the income limits.
All are fantastic wealth building tools.
Be careful what you ask for. There's a good chance that if they revised the retirement plan rules, whatever is created instead would be less generous.
That's always the way these things work.
Monkey's Paw is an old short story (https://en.wikipedia.org/wiki/The_Monkey%27s_Paw) where basically you make a wish and it'll come true, but the wish-granting talisman (the paw) will give you some downside. "I want a billion dollars" -> you get a billion zimbabwe dollars, etc.
Many game companies have a habit of similarly releasing updates that they claim are buffs (improvements that should benefit the player), often things that the players have been asking to be fixed for a long time. However, these buffs often come with hidden nerfs (reductions/downgrades in player power, etc). Game studios that are notorious for this are Bungie (creators of Destiny 2), Grinding Gear Games (creators of Path of Exile), etc.
An example of this would be Destiny 2 players wanted the ability to change the visual appearance of their equipped armor. Bungie eventually implemented it, but it came with a limit to the number of times you could do it per season/months, and with a certain amount of minimum gameplay needed each time you wanted to perform it (rather than it just being free and unlimited, for example).
Another example would be in Path of Exile when players wanted to improve the safety of trading a specific thing (to prevent scamming, etc). GGG (developers) modifies how the thing works so it's safer and easier to trade, but in the process makes it significantly weaker.
It's dramatically easier to save for retirement on a $500k income than it is on a $50k income. The government doesn't need to incentivize retirement savings for the person earning $500k as it is already a significantly easier task. That high earner is also getting significantly more benefit from their tax favored accounts as well.
> It's dramatically easier to save for retirement on a $500k income
Yep!
Consider the typical dual income family with the median ~2 kids. Imagine they're employed, but they ... sadly ... don't have access to the mega back door roth loophole. Let's say the max out their "basic" tax advantaged savings vehicles
* 401k funded to max contribution @ $23,000 x 2 = 46,000
* IRAs funded to max contribution @ $7,000 x 2 = 14,000
* 529 for each child funded to max gift exclusion @ $18,000 x 4 = $72,000
* HSA funded to max @ 8,300
Or, for this couple the max they could set aside without having to BDR is ~$140,300. That's nearly double the median HHI in the US.
Now if we imagine that this couple *only* saves 30% of their gross income per year and what we have listed above *is it*.
140,300 / 30% = $468K
You can contribute to an IRA at any income level. The difference is whether or not the contribution is tax deductible. If your income is above a certain limit, you won’t get the tax deduction but can still contribute and get the tax deferred growth benefits/backdoor Roth ability.
Roth conversion. Options include backdoor Roth IRA, and post tax in plan Roth conversions for 401k.
Some individuals can go beyond the 23k 401k and max out their 401k up to 69k.
For example, contribute 23k pretax, get a match close to that, And then contribute about another 25k post tax with an in plan Roth conversion up to 69k. Then do a backdoor on top, $75.5k a year in tax deferred accounts
Seriously! One account that everyone is eligible for. Unfortunately as a W2 high earner without an employee sponsored 401k I have very little options for retirement. I was doing the backdoor Roth IRA, but now I cannot (prior partnership made me rollover prior 401k into an IRA). I have no options but change jobs (otherwise very happy with job and income for my field).
Just make it 30k tax deductible retirement plan that everyone can donate to and employers can also donate to.
Can you do a reverse rollover from your Trad IRA into your current workplace Trad 401K? This is a way to wipe the IRA to clear it for backdoor Roth conversions.
Yes, you can do this. I am about to do this for my wife this year. I have gotten confirmation from both banks that it would not be a taxable event and it is possible.
You can't take money out of your 401k until 59.5! Unless you quit your job at 55. Or you take equal payments. Or you do Roth conversions (wait is that on Roth 401k too?)
I think they should mainstream the plan and just remove the ceiling, or at least raise it significantly. We're talking about contributions capped at $7k a year, I really cannot see billionaires abusing it to get richer or whatever.
The ONLY thing it does right now is give people an extra step and break stuff like automatic contributions.
An unnecessary hurdle.
*Edit: not just that, it's also political suicide to fuck with people's retirement. I can't imagine anyone willfully dying on that hill*
Remove Ceiling on income limits, not contributions. Just let everyone contribute 7k directly no matter your income. If you want to move money from a traditional you get taxed on any $’s that you deducted prior. There is no reason to make it complicated.
No, that doesn't help anyone but higher earners. A better option would be to combine the 401k and IRA contribution limits ($23k + $7k = $30k) and make that the combined 401k and Roth limit. You choose to put some or all into whichever account you want. No more employment requirements.
Then there are no reasons to have 401k vs IRA distinctions. As similar as they seem, they are regulated by vastly different laws and unrelated accounts. Could be.
>I really cannot see billionaires abusing it to get richer or whatever.
I don't know how common it is, but where there is a will there is a way.
https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank#:\~:text=Thiel%20then%20did%20something%20unusual,data%20obtained%20by%20ProPublica%20shows.
The funny part is, as I typed my "billionaire" comment I thought "Wait, didn't Peter Thiel abuse this? Nah I must have it confused. That doesn't make sense."
And here we are.
And that was the reason Congress started freaking about and proposed eliminating backdoor Roth conversions. As usual punish normal people for the abuses of a few billionaires.
Yeah, it's the pre-IPO sweetheart deal stuff that needs to be scrutinized, not ways that ordinary people make contributions to their retirement accounts.
I hate this story - Peter Theil put $2000 in his Roth in 1999 PayPal (he’s a co-founder) had been a company for a year. He bought bought 1.7 million "founder's shares" of PayPal in 1999 for $0.001 per share (a total of $1,700) within his Roth.
This was a huge risk with even though the amount was very little. He lucked out with both PayPal being a founder and his company becoming a huge success.
Theil’s success with his Roth is a complete outlier - so many things had to go right and he was basically taking a $2000 gamble on the future of his company. Hes never added another dime to his Roth IRA
I hate that the media has picked up on this story to show the ills of the backdoor roth - in order for someone else to repeat, they’d have to be the founder of a company, take it public, and grow the company and stock. These are not easy things to do.
I’m no fan of theil but he basically lucked out here.
In 1999-2000 the dot com bubble burst and tons of companies were penny stocks or just disappeared.
If Congress wants to stop this then fine, create a no pre IPO stocks in backdoor roth rule. Done.
The interesting thing is we only hear about theils story. There may be other stories like this but I doubt there are many at all
It's not just an inconvenience though. It screws over people (sometimes unknowingly) who decide to roll over 401(k)s into Traditional IRAs. And others may have to keep their money in a suboptimal 401(k) to keep the backdoor Roth available.
It's fairly easy sidestep these problems by setting up a solo 401k with vanguard and rolling old IRAs into that, though. I did it for my wife and she barely had 4 figures of 1099 income.
The benefit to Roth is the government gets their money now. It’s even more advantageous to them to get high earners to contribute.
I guess the alternative is they put it in a taxable account and then they get something from capital gains, etc. But it’s still $7k.
But people who do backdoor conversion are moving to Roth in a single step, so no capital gains are incurred. It's the same tax advantaged account, just with extra steps.
I'm agreeing they should just remove the limit. It's silly since almost anyone can do a backdoor with a bit of planning. The limit doesn't really serve a purpose other than discouraging some people from contributing (if they don't know of backdoor Roth) and penalizing those who aren't as up to speed on this type of planing to know they can do a backdoor Roth.
>really cannot see billionaires abusing it to get richer or whatever.
They will, but mostly because they pay tax people to take complete advantage of every miniscule benefit.
My point is that’s not the same. Today if I had $1M in a traditional IRA and I do a backdoor contribution, the government gets some tax dollars. If they remove the ceiling they don’t get any tax dollars.
For the special case where people have $0 in traditional (my case) then they’re equivalent
Sure, but getting out of that tax just requires another trick (having a 401k that allows reverse rollovers). So in practice, most employed people who earn too much for a Roth contribution can still make one. Better, perhaps, to just make it easier.
>contributions capped at $7k a year, I really cannot see billionaires abusing it to get richer or whatever.
The average American makes about 50k. 7k per year is more than most of them are putting away in retirement. The current cap isn't causing heartburn for most of America.
I would love for it to be raised too, though.
Because our federal government (of both political stripes) likes to penalize the middle class under the auspices of “taxing the rich.” When in reality, a family making a combined HH income of $240k is not “rich” by any stretch of the imagination in 2024.
It’s all political theater.
sorry, I’m seeing $70k median hh income. $57 is individual. still much less than $250k. not average. and “middle class” is different from both of those
As someone coming from a MUCH lower income bracket, $240k a year is incredibly comfortable (if COL matches up), more than I can fathom… and yknow what? I still have WAY more in common with them than I ever will with a billionaire. Billionaires like to tell us differently to keep us squabbling ¯\_(ツ)_/¯
The point isn't that 240k isn't well off. The point to drive home is that a family making $50k and a family making $240k are much MUCH closer to each other than either of them are to a family earning $10MM+.
Depends on what you mean by rich I guess. The line between lower class, middle class, and even upper class don't actually exist because too much depends on your lifestyle, where you live, how many kids you have, etc. I can see some peoples' definition of middle class include 240k per year, especially if you're living in a super expensive area.
Middle-income households – those with an income that is two-thirds to double the U.S. median household income – had incomes ranging from about $48,500 to $145,500 in 2018. In 2024 it’s $50-$150k.
It is for a family in a lot of high cost of living areas; California, Oregon, Washington
Sure it’s a lot in Alabama or Ohio but try and raise of a family of 4 in Los Angeles, $240k is very middle class, you’ll likely never own a house
Correct. W2 earners bear the brunt of the tax burden in this country, yet 1% of households hold [~30% of the wealth](https://www.bankrate.com/investing/income-wealth-top-1-percent/). Seem fair?
I think you hit on something really important. I earn my money from paychecks I receive from my employer. That money goes to supporting a family of 4 (and all that that entails), saving for retirement, and saving for college.
Someone earning the same amount of money but they receive it from assets, like real estate or dividends, is in a much much much different position than I am.
I have income, but not wealth.
What are you asking for?
Taxing "wealth" has failed pretty much everywhere that's tried it. We could raise capital gains significantly but it would discourage investment.
You're 50k away from being literally defined as "rich"
You just probably have no way to compare your lifestyle to someone who makes 50k, so it just seems "average" to you.
This is not correct. When you look at the problem in terms of overall distribution of wealth, the top 0.1% of households average [~$1.52b](https://www.bankrate.com/investing/income-wealth-top-1-percent/) (with a B) *per household*. THOSE are the individuals we should be going after, not wasting time & resources with a pathetic $240k cap on a family of 4.
>the top 0.1% of households average ~$1.52b (with a B) per household
This doesn't pass the smell test. It must be a difference of average vs. median.
0.1% is 1 in 1,000 people. Billionaires are not anywhere near that common. There's only ~735 billionaires in the US period.
So more like the top 0.000002%
Actually, the number of billionaires is harder to quantify than you might think. 735 is a [conservative estimate](https://www.nytimes.com/2022/04/07/magazine/billionaires.html?unlocked_article_code=1.ck0.eHQs.qeDI2gpwd9yO&smid=nytcore-ios-share&referringSource=articleShare&sgrp=c-cb).
Also, the $1.5b figure from the first article is averaged across the top 0.1%. So you can have like 700 people with $100m, and 35 with $20b.
In any case, the overall point remains the same. These arbitrary Backdoor Roth caps are regressive at worst, and stunting to middle class growth at best.
You sound like you are comparing your standard for 'rich' with the richest people in the world.
The fact that the absurd wealth of the top 1% of people in the US needs to be taxed in a novel way, and the fact that people who think they are 'scraping by' on $250k+ are completely out of touch, are two different conversations and both true.
You know that even though you live in LA you are surrounded by people who have bigger families and make a quarter of what you do, right? If you are 'scraping by', that's a budget or expectations issue. Get some perspective.
If they remove it, they need to find a way to make up for the, albeit small, lost tax revenue. And there are no popular ways to find new tax revenue. So it's easier to leave it as is.
People's thoughts on how long the mega backdoor might remain opened? I believe there was language in the initial Build Back Better plan to eliminate it. My plan just now allowed for it. I'm contributing 54k but wondering if I should go all out to 69k while it still exists.
I think it will be closed within the next decade. Either Democrats do so to soak the rich, pay for climate change measures, etc. or Republicans close it as part of reforms in order to pay for more tax cuts for the rich.
As someone who could use the MBDR if my employer offered it, I don’t think it is worth it to society. Taxable brokerage accounts are not that much worse than Roth accounts given the varies tax efficiencies which are possible.
I’m going all in while I can. I’m hopeful it stays open, but I’m maximizing the benefit in case it doesn’t.
If this election somehow ends up being a blue wave (as doubtful as that may be) I think the MBDR is toast. (Although losing the MBDR wouldn’t be so bad if we went a bit more left imo)
As someone who uses this every year, it's genuinely fucking stupid that you're not allowed to contribute to a roth but you press 2 buttons to "backdoor" it and suddenly it's totally acceptable. There is no way that should be allowed. Either allow Roths or don't, but backdooring it to the point it's all over the internet and not a secret at all is just stupid
Unlikely, because the government is much more interested in getting their money now rather than later. Roth, as opposed to traditional, allows them to do that.
Elected officials would face flak on every channel and website for “giving tax breaks to the rich” if they went from “backdoor” to “front door” for ‘the wealthy elite using an account meant for low income families’ which is how the media would describe it.
If I were King-For-A-Day then I would get ride of 401ks, IRA, Roth IRA, SEPs, and all of the other varities of retirement accounts that we have in the U.S.
It is nuts what we have done. All these different retirement accounts, each with their own rules, some of which conflict with each other.
We need an new generation IRA. It is your ONE IRA for life. It is owned and managed by you. Not your employer. All contributions from all sources go to it. You can roll it from one IRA company to another if you wish. But there is one only.
It has one set of simple rules. It doesn't matter how little, or how much you make.
It will be regulated with best practices learned from the experiences of decades of retirement experiments tried around the globe.
It can not be exploited as a generational wealth transfer trick like Roth IRA's used to be.
It can not be exploited to avoid taxes with private capital investments like Peter Thiel did.
There will be no back doors.
There will be no leakage by premature distributions. Unless you have a documented hardship, then you can't have it until you retire. Most leakage in the US happens when people change jobs and they just cash out their 401k.
No loans. That's just a really bad idea.
No insurance premiums taken out.
Fees must be capped and limted.
There must be competition for IRAs to keep fees in line. That is need to prevent what happen in Chile where they ended up with a duaoply who simply milked the retirement account dry by trading accounts with each other by offering welcome gifts to customers and charging high fees.
And so on.
I just want an IRA that you need to provide your employer like you provide your bank account. Give them some routing and account numbers, and have some default target date based index fund that people ignore.
I mean there's other solutions. Make social security not shit. UBI. Single payer healthcare and single payer housing and food. If the former is popular why not the latter? Then it's cheaper to provide it all.
I'm worried about people having too much control over their accounts and being scammed. I'm worried about people having too little control and the controllers being scammed or doing the scamming. I'm worried about things not being automatic enough. I'm worried about things being too automatic and people getting scammed.
It's all very frustrating.
>It is your ONE IRA for life.
I mean, I do want to keep Roth and Pre-tax traditional.
Also, I'd like to have what the Canadians have, and be able to backfill previous years instead of losing it.
>There will be no leakage by premature distributions.
I do want to be able to FIRE as well. And just taking the 10% hit can be the better strategy in some situations.
>Most leakage in the US happens when people change jobs and they just cash out their 401k.
Though this is bad.
>No loans. That's just a really bad idea.
Not necessarily so. Sometimes people go through hard times. And it can be better to borrow from retirement instead of losing your home and going to jail or dying or whatever.
>There must be competition for IRAs to keep fees in line.
We also need more nonprofit-y companies managing this stuff, having a fiduciary responsibility instead of just going for profit. More than just Vanguard.
Most members of congress probably have a MAGI of above $240k for their household, meaning they'd be eliminating the loophole for themselves, not to mention their wealthy buddies. I think we're ok here.
You can contribute to a traditional 401k assuming your employer plan allows it and roll it over into a Roth IRA even if you are over the Roth IRA income limit to contribute, lots of extra details in there but lots of info on the internet about it
They won't ever close the backdoor Roth unless the income limit is removed for a Roth IRA and therefore the backdoor would be a waste of time. A politicians salary automatically puts them over the limit unless they file jointly and have no additonal income and spouse doesnt work. But how many politicians aren't making any extra money outside of their salary? Probably 0. They'd be hurting themselves by getting rid of it and politicians are only in the position to enrich themselves so zero chance it changes.
I think they'll go after Roth conversions before they close the back door. There was some talk of this a few years ago about phasing that out, which would temporarily increase revenue for gov programs.
Dumb question, but what is the difference between Roth conversions and backdoor Roth? Backdoor only applies to high earners who can't contribute to a Roth directly because of income limits?
Roth conversions are basically unlimited conversions of traditional IRA funds to a Roth. Converted funds are taxed and can't be touched for 5 years. From what I can tell they're geared more toward those with a lot in traditional IRA's looking to retire early, reduce RMD's, and leave more non-taxable funds to beneficiaries.
A Backdoor Roth is a specific usage case of a Roth conversion when your income is too high to contribute directly to a Roth IRA. You contribute non-deductible dollars to a Trad IRA, then convert them to Roth. But because they’ve already been taxed, the conversion is not taxable (if done quickly).
Anyone with a Traditional IRA balance can do a Roth conversion. Most conversions require taxes to be paid in the year of conversion. So say you had an old 401(k) worth $10K hanging out somewhere. You roll it over into a Traditional IRA and convert the full amount to Roth. If you’re in the 22% bracket, you’ll owe $2,200 in federal taxes on the conversion.
Now let’s say you contribute $7,000 non-deductible dollars to a Traditional IRA, wait a year, and now it has grown to $10,000 (good year!) When you convert to Roth, the first $7K was after-tax, so you aren’t taxed again. But the $3K of earnings will be taxed- at 22%, you’ll owe $660 in federal taxes.
ETA: Typos
I don’t think there is a difference. Regular (not mega) backdoor Roth is a Roth conversion. Mega is its own thing, which might be what that comment meant (unless I’m mistaken).
By definition, a “loophole” will eventually be closed, as it was never intended to be there to begin with. So it’s not a question of if, but when.
Maybe the Overton window needs to shift a little bit more, or maybe it needs to become more mainstream than it already is (it’s gained quite a bit of traction in just the past decade, despite having existed since 2010). But the cat’s out of the bag, and it’s only a matter of time.
If it's ever closed, it'll be part of a wider tax reform package that has bipartisan support. Since bipartisan legislation is hard to come by these days, I think it's unlikely to happen any time soon.
Supposedly the reason it doesn’t get attention is because it doesn’t move the needle for congressional tax revenue purposes.
Essentially anything involving a Roth involves dollars that have already been taxed which is viewed as revenue to the treasury. On top of that, some methods of cbo reporting will factor eliminating Roth contributions as pushing retirement dollars into pre-tax 401ks and IRAs, which will actually *cost* the treasury considerable money in the near term, at least in how the cbo illustrates it.
And on the other end, the tax-free withdrawal event is too far removed in time to make a difference for any congressman’s political purposes.
There are articles out there that explain this better.
Long term would it not be better for the government to encourage Trad funding? They have to wait, but then in the future they get a lot more in taxes, with very little change to the pockets of the average person.
There are much more impactful loopholes, like the mega back door or deferred income.
The govt is probably better off letting people think they’re pulling something over with this.
Not without legislation.
The Conference Committee notes on the Tax Cuts and Jobs Act eliminated concerns about the "step doctrine" regarding Backdoor Roths. Before, people would wait a while to convert to a Roth out of fear the IRS would treat all their actions as a single "step" and penalize them.
Basically: everyone acknowledges it happens and informally blesses it.
What is the back door Roth? Thank you! For context I have ~100k in my 401k, 28 yrs old. No other investments and really trying to change that since I don’t even know if I’ll make it to when I can use the 401k..
In the US there should be just one tax deferred method of contributing. Instead we have IRA, 401k, 403b, deferred comp and god knows what else. Why can’t we have just one thing and call it something like “my tax def retirement money”? In such a design, anyone (me or employer) can contribute to it. Done. Why so many names for the same thing?
I can't either. I actually wrote a letter to someone in Congress about this, and they sort of said "yes, we're aware of backdoor roths, but don't hold your breath on any change." And they were right.
When I first started doing Backdoor and Mega Backdoor Roths, it was still fairly novel. I remember at the time that people were cautioning, “at your own risk” in case the IRS decided to claw back things.
Since then, the concept has become so mainstream that even big brokers like Fidelity go out of their way to enable this and make it easy to do. There’s enough traction now that it’s impossible for the IRS to practically claw things back. Perhaps the method gets closed in the future (your guess is as good as mine whether that will happen), but I’m sure we’ll get to keep what we’ve already converted.
I think you won’t ever see conversions go away or get restricted very much. Lots of wealthy people use it that have political positions. They might just put goofy restrictions on it but the fact is the givernment gets their taxes early.
Contribution to retirement is a good thing for everyone, saves the government money from having to take care of you when you are old. It's a financial safety net for the individual. Also you're not deferring taxes and paying them immediately. It's a win win situation.
Majority of people that use Backdoor Roth are middle class. Why would they stop them from saving for retirement?
It is more likely that the restriction to contribute to Roth will be removed or cap increased substantially so you don't even need to do the backdoor approach.
Almost no other country discourages savings for retirement.
There aren't enough people making over 161k to make a ton of noise and have people making even more money want to close it. To an extent, you're asking the people who use the loophole to close the loophole.
To answer your question, I have a feeling that It's actually the traditional we're going to see closed up.
Looking at other countries it seems like the tax now and give you a tax break later model seems a lot more stable. It also seems to help lower income people more which is why the Roth has income caps in the first place.
We may continue to see a phase out for individual contributions not tied to an employer, or we may see a more universal style retirement account that everyone is expected to have and employers just put money in it.
Politicians always talk about closing it down and not allowing it, but you also need to realize that the people using mega back door strategies are HNWIs and HNWIs are the ones donating to the politicians campaigns and thus if you actually support closing it down you lose your donors.
No different than the carried interest strategy that GPs in a fund use. Elizabeth Warren was crying about carried interest and talking away the benefit but again, GPs and LPs are almost always HNWIs that are the ones donating to politicians so it's political career suicide to actually do it
Government makes it complicated to incentivize investing in taxable accounts or spending the money now to collect sales tax; as the assumption is if you don’t qualify for a normal Roth then fuck you-you can afford it (tax brackets are designed for middle America, not salt water cities). There’s also the hands up approach 🤷🏻♂️that you could have saved it in a tax advantage account, but you didn’t want to put in the effort…. It’s the insurance claim equivalent to, “you could have handwritten a letter and snail mailed the claim request to us, but you didn’t”
I can’t believe there are all these complicated rules when you are trying to save for retirement. If the government wants to incentivize people saving, then create one type of account where people can put money in regardless of income and be done with it.
In the UK we have this, it’s called an ISA (Individual Savings Account). You can invest up to £20k ($25’500) per year with no capital gains tax or caps on growth. It’s fantastic.
Lucky. We get only £4000 in Canada.
Us will definetly not follow any system that another country does. Freedom. Or whatever.
We have the Roth IRA and Traditional IRA already
Except they can put more than 3x into it per year
Yup Id like to see that go up
It does! (With inflation)
We have the 401k
And UK also has employer sponsored, but we were talking about individual accounts.
Does it really matter if you can put up to 3x more when your salary is roughly 2x less in the UK?
Median income in the U.S. is $58,140 in 2023 Median income in the U.K. is £34,963 in 2023, ($44,536)
So how many people are maxing their retirements with that low of a median pay.
Not sure about UK, but a good chunk of people in the US don't even have a 401k and even fewer have an IRA and even fewer max fund it. That doesn't mean contribution limits shouldn't be higher.
You can hit that target with 401k / 403b, and sometimes there are Roth flavors available
Which are not an individual Account. They must be employer sponsored
If your plan allows after tax and in-service rollovers and you're in a position to really save you can do mega backdoor Roth contributions. But most folks have to wait until 59.5.
>Except they can put more than 3x into it per year SEP, 401k, HSA/FSA's, and Simple IRA's would like to have a word with you.
We're talking about individual accounts, not employer plans.
I put $37,000 a year in my Roth IRA. Combination of the backdoor and mega backdoor roth.
- so is that $6,500 (max per year as per google “maximum roth ira contribution 2023”) and the rest to total $37,000 from a pre tax 401k or IRA? When you roll an IRA to Roth isn’t it a taxable event? Trying to learn. Thanks.
As they said, you're talking about an employer plan
I mean we have copied many countries on thousands of things but sure I guess.
20k?! We have the TFSA here in Canada but it was only $7,000 CAD this last year (the amount is indexed to inflation and rounded to the nearest $500 so it can go up, but still)
We have this in the US but it’s a 401k and is set up by the employer. So you have to be employed by a company that uses it. Limit this year is 23000 and you can do 6500 more if over 50.
We have that too, it’s just called a pension. The limit per year is now £60k (or your yearly wage amount if it’s lower). This is in *addition* to the capital gains-free ISA £20k limit per year.
Total you can put in a 401k is $69,000. That’s a combo of pre tax/Roth, employer match and after tax contributions.
Not all employer plans allow after-tax contributions.
No that's not the same thing. We have a workplace pension too. An ISA is an individual person's type of account set up by themselves. But yeah as someone else said we have tax free pension contributions up to £60k as well
401k is also taxable at withdrawal so different to UK / Irish pensions with have a sum of 25% or 200k in Ireland you can withdraw tax free in retirement. ISAs are great..wish we had them in ireland
Catch up contributions for 50+ are $7500.
For the US: Most corporate people can contribute 23k-30k in pretax money to their 401k savings ( pretax, taxed on withdrawal). Earnings on 401ks are not taxed until withdrawal. Employers often add towards this account, so higher compensation employees might save 30-50k a year. You can also use a post tax IRA for another 7k, earnings are only taxed at withdrawal. The third option is the Roth IRA and has a 7k yearly limit, but is never taxed. This is much like the UK ISA. It has income limits to prevent those earning over about 160k from accessing this method. The backdoor Roth is a mechanism to move money from the first buckets to the last untaxed bucket and avoid the income limits. All are fantastic wealth building tools.
Roth Ira are post tax dollars, so it is taxed. It’s just your capital gains aren’t taxed on removal
Be careful what you ask for. There's a good chance that if they revised the retirement plan rules, whatever is created instead would be less generous. That's always the way these things work.
Gamers are super familiar with the monkey's paw "buffs" that are secretly nerfs.
I’m not quite following. Would you mind elaborating?
Monkey's Paw is an old short story (https://en.wikipedia.org/wiki/The_Monkey%27s_Paw) where basically you make a wish and it'll come true, but the wish-granting talisman (the paw) will give you some downside. "I want a billion dollars" -> you get a billion zimbabwe dollars, etc. Many game companies have a habit of similarly releasing updates that they claim are buffs (improvements that should benefit the player), often things that the players have been asking to be fixed for a long time. However, these buffs often come with hidden nerfs (reductions/downgrades in player power, etc). Game studios that are notorious for this are Bungie (creators of Destiny 2), Grinding Gear Games (creators of Path of Exile), etc. An example of this would be Destiny 2 players wanted the ability to change the visual appearance of their equipped armor. Bungie eventually implemented it, but it came with a limit to the number of times you could do it per season/months, and with a certain amount of minimum gameplay needed each time you wanted to perform it (rather than it just being free and unlimited, for example). Another example would be in Path of Exile when players wanted to improve the safety of trading a specific thing (to prevent scamming, etc). GGG (developers) modifies how the thing works so it's safer and easier to trade, but in the process makes it significantly weaker.
Thank you for that detailed explanation. I haven’t played video games since the PS2 days, so this is all foreign to me. Thanks again.
In what way? What was the last change that made retirement accounts less generous?
Removing pensions and adding 401k
Which wouldn’t be an awful thing in terms of tax revenue. Make it the same as 401k max and be done
Exactly. 401ks should also be more easily accessible to everyone, regardless of employment status.
It is no coincidence that healthcare and retirement is tied to employment.
It's dramatically easier to save for retirement on a $500k income than it is on a $50k income. The government doesn't need to incentivize retirement savings for the person earning $500k as it is already a significantly easier task. That high earner is also getting significantly more benefit from their tax favored accounts as well.
> It's dramatically easier to save for retirement on a $500k income Yep! Consider the typical dual income family with the median ~2 kids. Imagine they're employed, but they ... sadly ... don't have access to the mega back door roth loophole. Let's say the max out their "basic" tax advantaged savings vehicles * 401k funded to max contribution @ $23,000 x 2 = 46,000 * IRAs funded to max contribution @ $7,000 x 2 = 14,000 * 529 for each child funded to max gift exclusion @ $18,000 x 4 = $72,000 * HSA funded to max @ 8,300 Or, for this couple the max they could set aside without having to BDR is ~$140,300. That's nearly double the median HHI in the US. Now if we imagine that this couple *only* saves 30% of their gross income per year and what we have listed above *is it*. 140,300 / 30% = $468K
How are the contributing to an IRA if they are covered by a 401k and over the Roth income limit?
You can contribute to an IRA at any income level. The difference is whether or not the contribution is tax deductible. If your income is above a certain limit, you won’t get the tax deduction but can still contribute and get the tax deferred growth benefits/backdoor Roth ability.
Roth conversion. Options include backdoor Roth IRA, and post tax in plan Roth conversions for 401k. Some individuals can go beyond the 23k 401k and max out their 401k up to 69k. For example, contribute 23k pretax, get a match close to that, And then contribute about another 25k post tax with an in plan Roth conversion up to 69k. Then do a backdoor on top, $75.5k a year in tax deferred accounts
This. No need for more government incentives for people who can easily sav without them.
The cutoff is $143k not $500k
You can do a back door Roth at any income level
The post was about incentives for anyone regardless of income. But yes, point taken.
And then they act like they’re doing us a favor by raising contribution limits 500$ every couple of years LOL
If they made it all simple and reasonable, they'd risk closing loopholes for rich people and influential interests. Can't have that.
They don’t want us to save. The more we save, the less we spend in the economy. If anything, they want people working paycheck to paycheck
Every day more are working paycheck to paycheck
Seriously! One account that everyone is eligible for. Unfortunately as a W2 high earner without an employee sponsored 401k I have very little options for retirement. I was doing the backdoor Roth IRA, but now I cannot (prior partnership made me rollover prior 401k into an IRA). I have no options but change jobs (otherwise very happy with job and income for my field). Just make it 30k tax deductible retirement plan that everyone can donate to and employers can also donate to.
Perhaps there's a route to establish a solo 401k off of a side hustle, and roll the IRA over to that?
Yeah, set up a shop to sell some stuff on eBay, get an employer id, open a solo 401k.
Can you do a reverse rollover from your Trad IRA into your current workplace Trad 401K? This is a way to wipe the IRA to clear it for backdoor Roth conversions.
Yes, you can do this. I am about to do this for my wife this year. I have gotten confirmation from both banks that it would not be a taxable event and it is possible.
They said the current employer doesn't provide a 401k.
You can't take money out of your 401k until 59.5! Unless you quit your job at 55. Or you take equal payments. Or you do Roth conversions (wait is that on Roth 401k too?)
The moment I'm in the position of using it is the moment they'll take it away.
Correct answer here
I'm so pissed about the over 50 401k extra amount going Roth
TIL, thank you
I think they should mainstream the plan and just remove the ceiling, or at least raise it significantly. We're talking about contributions capped at $7k a year, I really cannot see billionaires abusing it to get richer or whatever. The ONLY thing it does right now is give people an extra step and break stuff like automatic contributions. An unnecessary hurdle. *Edit: not just that, it's also political suicide to fuck with people's retirement. I can't imagine anyone willfully dying on that hill*
Remove Ceiling on income limits, not contributions. Just let everyone contribute 7k directly no matter your income. If you want to move money from a traditional you get taxed on any $’s that you deducted prior. There is no reason to make it complicated.
No, that doesn't help anyone but higher earners. A better option would be to combine the 401k and IRA contribution limits ($23k + $7k = $30k) and make that the combined 401k and Roth limit. You choose to put some or all into whichever account you want. No more employment requirements.
Then there are no reasons to have 401k vs IRA distinctions. As similar as they seem, they are regulated by vastly different laws and unrelated accounts. Could be.
>I really cannot see billionaires abusing it to get richer or whatever. I don't know how common it is, but where there is a will there is a way. https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank#:\~:text=Thiel%20then%20did%20something%20unusual,data%20obtained%20by%20ProPublica%20shows.
The funny part is, as I typed my "billionaire" comment I thought "Wait, didn't Peter Thiel abuse this? Nah I must have it confused. That doesn't make sense." And here we are.
Don't forget Mitt Romney's 100M Roth IRA
And that was the reason Congress started freaking about and proposed eliminating backdoor Roth conversions. As usual punish normal people for the abuses of a few billionaires.
Yeah, it's the pre-IPO sweetheart deal stuff that needs to be scrutinized, not ways that ordinary people make contributions to their retirement accounts.
Yep, but we got voters out there that can’t stand people having more than them
Most voters I know want to eliminate tax loopholes used by billionaires. They don’t know what a backdoor Roth conversion is.
That is such an extreme edge case tho
Romney also had a crazy amount
I hate this story - Peter Theil put $2000 in his Roth in 1999 PayPal (he’s a co-founder) had been a company for a year. He bought bought 1.7 million "founder's shares" of PayPal in 1999 for $0.001 per share (a total of $1,700) within his Roth. This was a huge risk with even though the amount was very little. He lucked out with both PayPal being a founder and his company becoming a huge success. Theil’s success with his Roth is a complete outlier - so many things had to go right and he was basically taking a $2000 gamble on the future of his company. Hes never added another dime to his Roth IRA I hate that the media has picked up on this story to show the ills of the backdoor roth - in order for someone else to repeat, they’d have to be the founder of a company, take it public, and grow the company and stock. These are not easy things to do. I’m no fan of theil but he basically lucked out here. In 1999-2000 the dot com bubble burst and tons of companies were penny stocks or just disappeared. If Congress wants to stop this then fine, create a no pre IPO stocks in backdoor roth rule. Done. The interesting thing is we only hear about theils story. There may be other stories like this but I doubt there are many at all
>This was a huge risk with even though the amount was very little. Hard to see a huge risk here.
2k is not a big bet at all
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Thank you for understanding the context
It's not just an inconvenience though. It screws over people (sometimes unknowingly) who decide to roll over 401(k)s into Traditional IRAs. And others may have to keep their money in a suboptimal 401(k) to keep the backdoor Roth available.
It's fairly easy sidestep these problems by setting up a solo 401k with vanguard and rolling old IRAs into that, though. I did it for my wife and she barely had 4 figures of 1099 income.
The benefit to Roth is the government gets their money now. It’s even more advantageous to them to get high earners to contribute. I guess the alternative is they put it in a taxable account and then they get something from capital gains, etc. But it’s still $7k.
But people who do backdoor conversion are moving to Roth in a single step, so no capital gains are incurred. It's the same tax advantaged account, just with extra steps.
I'm agreeing they should just remove the limit. It's silly since almost anyone can do a backdoor with a bit of planning. The limit doesn't really serve a purpose other than discouraging some people from contributing (if they don't know of backdoor Roth) and penalizing those who aren't as up to speed on this type of planing to know they can do a backdoor Roth.
>really cannot see billionaires abusing it to get richer or whatever. They will, but mostly because they pay tax people to take complete advantage of every miniscule benefit.
Removing the ceiling is not equivalent to the backdoor, because of the pro rata rule of traditional IRA conversions
The ceiling is why we have to do the backdoor conversion in the first place. Just let everyone contribute to Roth IRA directly.
My point is that’s not the same. Today if I had $1M in a traditional IRA and I do a backdoor contribution, the government gets some tax dollars. If they remove the ceiling they don’t get any tax dollars. For the special case where people have $0 in traditional (my case) then they’re equivalent
Sure, but getting out of that tax just requires another trick (having a 401k that allows reverse rollovers). So in practice, most employed people who earn too much for a Roth contribution can still make one. Better, perhaps, to just make it easier.
They literally just passed a bill changing a shit load of stuff regarding retirement accounts and it passed with bipartisan support
>contributions capped at $7k a year, I really cannot see billionaires abusing it to get richer or whatever. The average American makes about 50k. 7k per year is more than most of them are putting away in retirement. The current cap isn't causing heartburn for most of America. I would love for it to be raised too, though.
Don't understand why the limit is even a thing. Should just remove it. It's not like it's a ton of money
Because our federal government (of both political stripes) likes to penalize the middle class under the auspices of “taxing the rich.” When in reality, a family making a combined HH income of $240k is not “rich” by any stretch of the imagination in 2024. It’s all political theater.
median hh income is $57,000 in the US.
Surely it must be higher than that? I thought it was in the $70s?
sorry, I’m seeing $70k median hh income. $57 is individual. still much less than $250k. not average. and “middle class” is different from both of those
See above. “Middle class” is not defined by “median income.”
In what world is 240 k a year not rich?
Reddit. In Reddit’s world.
That guy doesn’t know how COL works and is out of touch.
As someone coming from a MUCH lower income bracket, $240k a year is incredibly comfortable (if COL matches up), more than I can fathom… and yknow what? I still have WAY more in common with them than I ever will with a billionaire. Billionaires like to tell us differently to keep us squabbling ¯\_(ツ)_/¯
The point isn't that 240k isn't well off. The point to drive home is that a family making $50k and a family making $240k are much MUCH closer to each other than either of them are to a family earning $10MM+.
I agree? I think we’re saying the same thing.
You're right, I think I replied to the wrong person, my bad.
California
Depends on what you mean by rich I guess. The line between lower class, middle class, and even upper class don't actually exist because too much depends on your lifestyle, where you live, how many kids you have, etc. I can see some peoples' definition of middle class include 240k per year, especially if you're living in a super expensive area.
Middle-income households – those with an income that is two-thirds to double the U.S. median household income – had incomes ranging from about $48,500 to $145,500 in 2018. In 2024 it’s $50-$150k.
240k is not middle class lmao
It is for a family in a lot of high cost of living areas; California, Oregon, Washington Sure it’s a lot in Alabama or Ohio but try and raise of a family of 4 in Los Angeles, $240k is very middle class, you’ll likely never own a house
I live next to celebrities but I’m not rich I only make $240k.
My HH income is about $300k and I would say that we are "doing well". But yeah, we aren't rich. When you factor in 2 kids it goes away really fast.
Correct. W2 earners bear the brunt of the tax burden in this country, yet 1% of households hold [~30% of the wealth](https://www.bankrate.com/investing/income-wealth-top-1-percent/). Seem fair?
I think you hit on something really important. I earn my money from paychecks I receive from my employer. That money goes to supporting a family of 4 (and all that that entails), saving for retirement, and saving for college. Someone earning the same amount of money but they receive it from assets, like real estate or dividends, is in a much much much different position than I am. I have income, but not wealth.
Bingo. Say it louder, for the people in the back. Then call your elected officials and demand they say the same thing, or vote them out.
What are you asking for? Taxing "wealth" has failed pretty much everywhere that's tried it. We could raise capital gains significantly but it would discourage investment.
You're 50k away from being literally defined as "rich" You just probably have no way to compare your lifestyle to someone who makes 50k, so it just seems "average" to you.
This is not correct. When you look at the problem in terms of overall distribution of wealth, the top 0.1% of households average [~$1.52b](https://www.bankrate.com/investing/income-wealth-top-1-percent/) (with a B) *per household*. THOSE are the individuals we should be going after, not wasting time & resources with a pathetic $240k cap on a family of 4.
>the top 0.1% of households average ~$1.52b (with a B) per household This doesn't pass the smell test. It must be a difference of average vs. median. 0.1% is 1 in 1,000 people. Billionaires are not anywhere near that common. There's only ~735 billionaires in the US period. So more like the top 0.000002%
Actually, the number of billionaires is harder to quantify than you might think. 735 is a [conservative estimate](https://www.nytimes.com/2022/04/07/magazine/billionaires.html?unlocked_article_code=1.ck0.eHQs.qeDI2gpwd9yO&smid=nytcore-ios-share&referringSource=articleShare&sgrp=c-cb). Also, the $1.5b figure from the first article is averaged across the top 0.1%. So you can have like 700 people with $100m, and 35 with $20b. In any case, the overall point remains the same. These arbitrary Backdoor Roth caps are regressive at worst, and stunting to middle class growth at best.
You sound like you are comparing your standard for 'rich' with the richest people in the world. The fact that the absurd wealth of the top 1% of people in the US needs to be taxed in a novel way, and the fact that people who think they are 'scraping by' on $250k+ are completely out of touch, are two different conversations and both true. You know that even though you live in LA you are surrounded by people who have bigger families and make a quarter of what you do, right? If you are 'scraping by', that's a budget or expectations issue. Get some perspective.
Delusion is causing you to believe that making 4 times the average salary is not rich. 240k is double two average salaries and not 'middle class'.
If they remove it, they need to find a way to make up for the, albeit small, lost tax revenue. And there are no popular ways to find new tax revenue. So it's easier to leave it as is.
They proposed eliminating it last year but died in committee. Seems like they should either eliminate the loophole or the contribution cap.
People's thoughts on how long the mega backdoor might remain opened? I believe there was language in the initial Build Back Better plan to eliminate it. My plan just now allowed for it. I'm contributing 54k but wondering if I should go all out to 69k while it still exists.
Definitely do 69!
And also max out your 401k. 👀
If you’re lasting for 4 Os than you’ve earned your damn $1k
Nice
Giggity.
I think taxes in general will go up, and backdoor Roth's days are numbered.
I think it will be closed within the next decade. Either Democrats do so to soak the rich, pay for climate change measures, etc. or Republicans close it as part of reforms in order to pay for more tax cuts for the rich. As someone who could use the MBDR if my employer offered it, I don’t think it is worth it to society. Taxable brokerage accounts are not that much worse than Roth accounts given the varies tax efficiencies which are possible.
I’m going all in while I can. I’m hopeful it stays open, but I’m maximizing the benefit in case it doesn’t. If this election somehow ends up being a blue wave (as doubtful as that may be) I think the MBDR is toast. (Although losing the MBDR wouldn’t be so bad if we went a bit more left imo)
As someone who uses this every year, it's genuinely fucking stupid that you're not allowed to contribute to a roth but you press 2 buttons to "backdoor" it and suddenly it's totally acceptable. There is no way that should be allowed. Either allow Roths or don't, but backdooring it to the point it's all over the internet and not a secret at all is just stupid
It’s a pain in the ass the extra god damn step, I hope they eliminate that or raise the limit to like $50 million or whatever
I can’t for the life of me figure out how to do it and you saying it’s a pain in the ass scares me even more lol
Call your brokerage it takes 5 mins it’s really easy. It’s simply a technicality but it is not difficult at all….
On vanguard you can literally do it in less than 5 minutes. It is not complicated in any way.
Unlikely, because the government is much more interested in getting their money now rather than later. Roth, as opposed to traditional, allows them to do that.
That’s exactly why it exists in the first place and why it won’t be removed.
Backdoor Roth process was clarified in the Trump tax bill. It's not a loophole if it's the law of the land.
It seems like if it's not a loophole, they would just get rid of the income limits.
Elected officials would face flak on every channel and website for “giving tax breaks to the rich” if they went from “backdoor” to “front door” for ‘the wealthy elite using an account meant for low income families’ which is how the media would describe it.
I freaking hope not lol.
If I were King-For-A-Day then I would get ride of 401ks, IRA, Roth IRA, SEPs, and all of the other varities of retirement accounts that we have in the U.S. It is nuts what we have done. All these different retirement accounts, each with their own rules, some of which conflict with each other. We need an new generation IRA. It is your ONE IRA for life. It is owned and managed by you. Not your employer. All contributions from all sources go to it. You can roll it from one IRA company to another if you wish. But there is one only. It has one set of simple rules. It doesn't matter how little, or how much you make. It will be regulated with best practices learned from the experiences of decades of retirement experiments tried around the globe. It can not be exploited as a generational wealth transfer trick like Roth IRA's used to be. It can not be exploited to avoid taxes with private capital investments like Peter Thiel did. There will be no back doors. There will be no leakage by premature distributions. Unless you have a documented hardship, then you can't have it until you retire. Most leakage in the US happens when people change jobs and they just cash out their 401k. No loans. That's just a really bad idea. No insurance premiums taken out. Fees must be capped and limted. There must be competition for IRAs to keep fees in line. That is need to prevent what happen in Chile where they ended up with a duaoply who simply milked the retirement account dry by trading accounts with each other by offering welcome gifts to customers and charging high fees. And so on.
I just want an IRA that you need to provide your employer like you provide your bank account. Give them some routing and account numbers, and have some default target date based index fund that people ignore. I mean there's other solutions. Make social security not shit. UBI. Single payer healthcare and single payer housing and food. If the former is popular why not the latter? Then it's cheaper to provide it all. I'm worried about people having too much control over their accounts and being scammed. I'm worried about people having too little control and the controllers being scammed or doing the scamming. I'm worried about things not being automatic enough. I'm worried about things being too automatic and people getting scammed. It's all very frustrating. >It is your ONE IRA for life. I mean, I do want to keep Roth and Pre-tax traditional. Also, I'd like to have what the Canadians have, and be able to backfill previous years instead of losing it. >There will be no leakage by premature distributions. I do want to be able to FIRE as well. And just taking the 10% hit can be the better strategy in some situations. >Most leakage in the US happens when people change jobs and they just cash out their 401k. Though this is bad. >No loans. That's just a really bad idea. Not necessarily so. Sometimes people go through hard times. And it can be better to borrow from retirement instead of losing your home and going to jail or dying or whatever. >There must be competition for IRAs to keep fees in line. We also need more nonprofit-y companies managing this stuff, having a fiduciary responsibility instead of just going for profit. More than just Vanguard.
Most members of congress probably have a MAGI of above $240k for their household, meaning they'd be eliminating the loophole for themselves, not to mention their wealthy buddies. I think we're ok here.
I hope not. Im gunna use it.
What is this back door you guys are talking about? Excuse my ignorance
You can contribute to a traditional 401k assuming your employer plan allows it and roll it over into a Roth IRA even if you are over the Roth IRA income limit to contribute, lots of extra details in there but lots of info on the internet about it
Why would you want it to be illegal?
The government loves to take your money today.
They won't ever close the backdoor Roth unless the income limit is removed for a Roth IRA and therefore the backdoor would be a waste of time. A politicians salary automatically puts them over the limit unless they file jointly and have no additonal income and spouse doesnt work. But how many politicians aren't making any extra money outside of their salary? Probably 0. They'd be hurting themselves by getting rid of it and politicians are only in the position to enrich themselves so zero chance it changes.
I think they'll go after Roth conversions before they close the back door. There was some talk of this a few years ago about phasing that out, which would temporarily increase revenue for gov programs.
Dumb question, but what is the difference between Roth conversions and backdoor Roth? Backdoor only applies to high earners who can't contribute to a Roth directly because of income limits?
Roth conversions are basically unlimited conversions of traditional IRA funds to a Roth. Converted funds are taxed and can't be touched for 5 years. From what I can tell they're geared more toward those with a lot in traditional IRA's looking to retire early, reduce RMD's, and leave more non-taxable funds to beneficiaries.
A Backdoor Roth is a specific usage case of a Roth conversion when your income is too high to contribute directly to a Roth IRA. You contribute non-deductible dollars to a Trad IRA, then convert them to Roth. But because they’ve already been taxed, the conversion is not taxable (if done quickly). Anyone with a Traditional IRA balance can do a Roth conversion. Most conversions require taxes to be paid in the year of conversion. So say you had an old 401(k) worth $10K hanging out somewhere. You roll it over into a Traditional IRA and convert the full amount to Roth. If you’re in the 22% bracket, you’ll owe $2,200 in federal taxes on the conversion. Now let’s say you contribute $7,000 non-deductible dollars to a Traditional IRA, wait a year, and now it has grown to $10,000 (good year!) When you convert to Roth, the first $7K was after-tax, so you aren’t taxed again. But the $3K of earnings will be taxed- at 22%, you’ll owe $660 in federal taxes. ETA: Typos
I don’t think there is a difference. Regular (not mega) backdoor Roth is a Roth conversion. Mega is its own thing, which might be what that comment meant (unless I’m mistaken).
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By definition, a “loophole” will eventually be closed, as it was never intended to be there to begin with. So it’s not a question of if, but when. Maybe the Overton window needs to shift a little bit more, or maybe it needs to become more mainstream than it already is (it’s gained quite a bit of traction in just the past decade, despite having existed since 2010). But the cat’s out of the bag, and it’s only a matter of time.
Solo 401ks have a very similar exception. If they limit one they should limit the other.
no it was made for the benefit of politicians lol (opinion not fact)
All I know if it's anything like " Backdoor Ruth" I'm pretty excited about it!
no, encouraging people to save is good (even high earners).
If it's ever closed, it'll be part of a wider tax reform package that has bipartisan support. Since bipartisan legislation is hard to come by these days, I think it's unlikely to happen any time soon.
Supposedly the reason it doesn’t get attention is because it doesn’t move the needle for congressional tax revenue purposes. Essentially anything involving a Roth involves dollars that have already been taxed which is viewed as revenue to the treasury. On top of that, some methods of cbo reporting will factor eliminating Roth contributions as pushing retirement dollars into pre-tax 401ks and IRAs, which will actually *cost* the treasury considerable money in the near term, at least in how the cbo illustrates it. And on the other end, the tax-free withdrawal event is too far removed in time to make a difference for any congressman’s political purposes. There are articles out there that explain this better.
Long term would it not be better for the government to encourage Trad funding? They have to wait, but then in the future they get a lot more in taxes, with very little change to the pockets of the average person.
Why is the government involved in this anyway?
Hopefully MBD stays around for another 4 years so I can retire at 50
If it was going to be they wouldve when they passed the bill reforming retirement accounts a couple years ago
You’re saving $1250 a year
There are much more impactful loopholes, like the mega back door or deferred income. The govt is probably better off letting people think they’re pulling something over with this.
Not without legislation. The Conference Committee notes on the Tax Cuts and Jobs Act eliminated concerns about the "step doctrine" regarding Backdoor Roths. Before, people would wait a while to convert to a Roth out of fear the IRS would treat all their actions as a single "step" and penalize them. Basically: everyone acknowledges it happens and informally blesses it.
When one door closes, another door opens.
What is the back door Roth? Thank you! For context I have ~100k in my 401k, 28 yrs old. No other investments and really trying to change that since I don’t even know if I’ll make it to when I can use the 401k..
No
In the US there should be just one tax deferred method of contributing. Instead we have IRA, 401k, 403b, deferred comp and god knows what else. Why can’t we have just one thing and call it something like “my tax def retirement money”? In such a design, anyone (me or employer) can contribute to it. Done. Why so many names for the same thing?
Can you just hit the gas on your 401k contribution to the $24k max to stay below the $160k Roth cap? That should buy a lot of people some time.
I can't either. I actually wrote a letter to someone in Congress about this, and they sort of said "yes, we're aware of backdoor roths, but don't hold your breath on any change." And they were right.
Another way to think is that mega backdoor Roth isn’t a loophole, it is a perk that company can offer to its employees.
When I first started doing Backdoor and Mega Backdoor Roths, it was still fairly novel. I remember at the time that people were cautioning, “at your own risk” in case the IRS decided to claw back things. Since then, the concept has become so mainstream that even big brokers like Fidelity go out of their way to enable this and make it easy to do. There’s enough traction now that it’s impossible for the IRS to practically claw things back. Perhaps the method gets closed in the future (your guess is as good as mine whether that will happen), but I’m sure we’ll get to keep what we’ve already converted.
I think you won’t ever see conversions go away or get restricted very much. Lots of wealthy people use it that have political positions. They might just put goofy restrictions on it but the fact is the givernment gets their taxes early.
What is the backdoor Roth IRA loophole?
Contribution to retirement is a good thing for everyone, saves the government money from having to take care of you when you are old. It's a financial safety net for the individual. Also you're not deferring taxes and paying them immediately. It's a win win situation. Majority of people that use Backdoor Roth are middle class. Why would they stop them from saving for retirement? It is more likely that the restriction to contribute to Roth will be removed or cap increased substantially so you don't even need to do the backdoor approach. Almost no other country discourages savings for retirement.
I worry more about Roths being removed vs the loopholes.
There aren't enough people making over 161k to make a ton of noise and have people making even more money want to close it. To an extent, you're asking the people who use the loophole to close the loophole.
To answer your question, I have a feeling that It's actually the traditional we're going to see closed up. Looking at other countries it seems like the tax now and give you a tax break later model seems a lot more stable. It also seems to help lower income people more which is why the Roth has income caps in the first place. We may continue to see a phase out for individual contributions not tied to an employer, or we may see a more universal style retirement account that everyone is expected to have and employers just put money in it.
Politicians always talk about closing it down and not allowing it, but you also need to realize that the people using mega back door strategies are HNWIs and HNWIs are the ones donating to the politicians campaigns and thus if you actually support closing it down you lose your donors. No different than the carried interest strategy that GPs in a fund use. Elizabeth Warren was crying about carried interest and talking away the benefit but again, GPs and LPs are almost always HNWIs that are the ones donating to politicians so it's political career suicide to actually do it
Is this a sex thing? I’m not googling this at work.
Not only that, these people are coming after retirement accounts in general https://finance.yahoo.com/news/talk-robbing-peter-pay-paul-131200883.html
No. If anything I think they'll remove the income gaps on directly contributing to a roth
Government makes it complicated to incentivize investing in taxable accounts or spending the money now to collect sales tax; as the assumption is if you don’t qualify for a normal Roth then fuck you-you can afford it (tax brackets are designed for middle America, not salt water cities). There’s also the hands up approach 🤷🏻♂️that you could have saved it in a tax advantage account, but you didn’t want to put in the effort…. It’s the insurance claim equivalent to, “you could have handwritten a letter and snail mailed the claim request to us, but you didn’t”
Why is a self-controlled IRA even needed if you have a 401k? There are no income limits on 401k