The End of the Mega Backdoor Roth

Why it is critical to take advantage of this strategy while it is still available.

Is this the end of the mega backdoor Roth tax loophole?

Watch Here:

Resources:

• Legislative text: House ways and means committee
• Explanation text: House ways and means committee

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Alex Okugawa 0:00
Is this the end of the backdoor Roth IRA as we know it? Today, we’re going to talk about the newly released proposal by Congress that might potentially kill this very lucrative strategy. Okay, Anthony. So Congress has recently released a proposal on a new tax plan. Within there, there are a lot of provisions, one of which provisions appears to kill this backdoor Roth IRA strategy. So first, can we just start with what’s the backdoor Roth strategy?

Anthony Saffer 0:27
Right, we’ve been proponents of this strategy. And we’ve talked about it before, I will post that in the in the notes here, it’s basically making after tax contributions to an IRA or even within an employer plan, like a 401k. And being able to roll those out to a Roth IRA, with the benefit being that any growth on those investments would be tax free when you withdraw. Yeah.

Alex Okugawa 0:47
And so there can be a lot of jargon in there. But I think in simple terms, like, why is this so powerful? Like why even do this strategy in the first place? So

Anthony Saffer 0:54
So growth that can you know, compound over time and retirement account of all those earnings come out tax free, especially the more years you have, and to have a pool of money in retirement that you don’t have to pay taxes on, not only helps save taxes, but it also gives you a ton of tax planning, flexibility when you get into retirement?

Alex Okugawa 1:13
Well, I think too, for a lot of folks, what we’re looking at is like their marginal tax rate, right? Because I think what we can all agree upon is taxes, at least appear to be on a historically low level, right? If I was a betting man, and I was to say, are taxes going to go down or up in the future, I’d say, they’re probably going to go up in the future. So if we can lock in those lower tax rates today, get compound tax free growth, and then later in the future, when tax rates are likely to be higher, you can take out that money tax free. That’s a really big win, especially for some high income earners. Yeah.

Anthony Saffer 1:47
So this proposal will will basically kill that strategy after tax contributions can’t be rolled out into a Roth.

Alex Okugawa 1:53
So what’s that timeline is endos. Time? Yeah, so

Anthony Saffer 1:57
we basically have until the end of the year, at least the way it’s written now, which means in 2022, you can’t you can’t do it anymore. And so, you know, it is one of those things where it does remind you that when these strategies are available, it doesn’t mean they’re gonna last forever.

Alex Okugawa 2:09
Yeah, especially like, exactly, exactly. To your point when we’re talking about planning strategies. I know, a lot of times, it’s like, I don’t know, if I want to get to it. You know what, maybe we’ll do it next year. And to your point, like, well, we don’t know when tax laws might change. So what strategies are available, we it’s a really good idea to take advantage of them, because like you said, it at least appears it’s still a proposal, so who knows what will actually be finalized. But that strategy could be killed by the end of

Anthony Saffer 2:33
this year. This is one of those things that it is a proposal. And so we’ve talked before, like you don’t want to go out and make extreme decisions based on proposal. But this is the type of thing where if you’re planning to do it, you know, now could be a good time to do it. I mean, it’s not going to necessarily hurt in the future.

Alex Okugawa 2:48
Your tax bill in retirement and over your lifetime is likely to be your biggest expense. So this is the kind of stuff that we want to help folks with with. We want to take a look at your tax return. What’s your marginal rate? What are you paying that? What might you pay in the future? And how do we lower your taxes both today? And in the future? This is the type of stuff that we help folks with. If you’d like to learn more, visit our website at onedegreeadvisors.com you can schedule a quick 15 minute call. We’d love to talk with you.