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Backdoor Roth Lockdown Plan Is Back; Here's What Advisors Should Do Next: Ed Slott

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What You Need to Know

  • House Democrats changed some of the effective dates in their revised plan, Ed Slott said.
  • The estate tax and capital gains tax changes are out as of now.
  • This is a very fluid situation that advisors must stay on top of, Slott said.

The elimination of backdoor Roth IRA conversions has made it back into the latest version of House Democrats’ tax and spending bill.

President Joe Biden’s Build Back Better framework excluded the retirement planning provisions that were approved in the House Ways and Means Committee’s Build Back Better bill in mid-September.

House Democrats “changed some of the effective dates” for some of the provisions, with “some not effective until 2029, so that’s a long way out,” IRA expert Ed Slott of Ed Slott & Co. told ThinkAdvisor Thursday morning.

The estate tax and capital gains tax changes “are out,” as far as the updates made to House Democrats’ plan last night, Slott said.

The updated bill would prohibit further contributions to a Roth or traditional IRA for a taxable year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceed $10 million as of the end of the prior taxable year. This limit would apply to taxpayers with income in excess of $400,000 (single), or $450,000 (married-joint), but would not be effective until 2029.

An increase to required minimum distributions from IRAs larger than $10 million would be pushed back “from starting next year to now starting in 2029 for some reason,” Slott said.

Under that provision, if an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required in 2029.

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This RMD would be 50% of the balance above $10 million, and this provision would apply to those with incomes over the same limits as above ($400,000/$450,000). “There would be even larger RMDs for those with balances over $20 million,” Slott noted.

“But the all-out ban on backdoor Roth IRAs would hit next year, as in the original version,” Slott continued.

What Should Advisors Do?

For advisors, “it’s best to sit back right now until they finish fighting this out,” Slott said.

“This is a very fluid situation,” Slott said. “What it shows is this stuff never really goes away.”

These provisions “might stay in; but at the last minute it might come out,” Slott said. “So what advisors have to know: they have to know this stuff is out there — whether it passes or not — because you have to have an eye on long-term planning.”

Advisors with high-income clients interested in these strategies “may still want to start a plan to do a series of conversions over the next few years because these things may actually become law at some point. So the whole point is to be prepared.”

Slott added: “It always seems that if anything gets enacted, it get enacted in late December.” So advisors need to have “their antennas up, to know what’s out there, and get the wheels in motion now so that if you do have to pull the switch or hit the switch on the planning at the last minute, it’s all set up.”

Image: Chris Nicholls/ALM