Banning Roth Conversions

Current law provides income restrictions that prohibit high-income taxpayers from contributing directly to a Roth IRA. Taxpayers whose income falls above those limits are typically required to execute a backdoor strategy to fund a Roth by contributing to a traditional IRA and executing a Roth conversion (and paying taxes on the amounts converted). Under the most recent House Ways and Means Committee proposal, Roth conversions would be banned for married couples earning more than $450,000 and single taxpayers earning more than $400,000 per year (beginning in 2032). Conversions of employee contributions to qualified plans into Roth IRAs would be prohibited for all taxpayers beginning in 2022.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the proposed limitations to the Roth conversion rules.

Below is a summary of the debate that ensued between the two professors.

Their Votes:







Bloink










Byrnes





Their Reasons:

Bloink: Roth retirement accounts are granted certain tax benefits in order to incentivize saving for retirement. Wealthy taxpayers can’t contribute directly to the Roth—so engage in conversion strategies to find a “back door” in and benefit from rules designed to help the middle class during retirement. Under current law, many of these Roth accounts end up functioning more like tax-preferred estate planning vehicles for wealthy Americans—where all gains within the account can be received without paying any future taxes on those gains. This just gives wealthy Americans yet another way to game the system and pass wealth to heirs without paying their fair share of taxes.

Byrnes: A proposal banning Roth conversions for high-income clients makes no sense. Roth conversions are a huge revenue-producer for the federal government. The reason these conversions are permitted in the first place is because it allows the government to get their hands on taxpayer dollars today—rather than waiting for decades until the taxpayer starts taking RMDs from traditional retirement accounts and paying the associated income taxes. The benefit of receiving those tax dollars early can’t be overlooked.

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Bloink: Roth conversions provide a means for wealthy taxpayers to fund an account that's designed for middle-income Americans. We have Roth income-based contribution limits for a reason. The wealthiest taxpayers don't need this valuable tax benefit—and, in fact, often don't use their Roth accounts to fund their intended purpose: retirement income. Instead, wealthy taxpayers use backdoor strategies to fund these accounts as estate planning mechanisms to transfer wealth to future generations without paying taxes on the appreciation in value.

Byrnes: Banning Roth conversions would eliminate a valuable revenue stream that our government—which is so intent on passing this new spending bill—needs revenue more than ever to support the Democrats' ambitious spending plans.

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Bloink: Banning all Roth conversions for high-income taxpayers would eliminate this tax-preferred wealth transfer strategy and be a big step toward ensuring that Roth accounts are used for their intended purpose. The current income restrictions clearly aren’t working and this is a major tax loophole that we currently have the means to plug.

Byrnes: This proposal will never pass. Even if some version does make it into the law, it’ll likely be accompanied by tax hikes that will make Roth conversions less attractive than ever. The end result will be to encourage wealthy taxpayers to explore alternative tax minimization solutions and create new estate planning techniques.