Backdoor Roth Conversions- No More?

[BLADEMDA]

In order to close these so-called “back-door” Roth IRA strategies, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

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[BLADEMDA]

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year. It would also prevent savers from using the “mega-backdoor Roth” strategy, regardless of income level.​

House Democrats propose new retirement plan rules for the rich, including contribution limits and a repeal of Roth conversions

A proposal from House Dems would repeal Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

www.cnbc.com

 

[BLADEMDA]

Part 2 – Tax Increases for High-Income Individuals Sec. 138201. Increase in Top Marginal Individual Income Tax Rate. The provision increases the top marginal individual income tax rate in section 1(j)(2) to 39.6%. This marginal rate applies to married individuals filing jointly with taxable income over $450,000, to heads of households with taxable income over $425,000, to unmarried individuals with taxable income over $400,000, to married individuals filing separate returns with taxable income over $225,000, and to estates and trusts with taxable income over $12,500. The amendments made by this section apply to taxable years beginning after December 31, 2021.

Sec. 138202. Increase in Capital Gains Rate for Certain High Income Individuals The provision increases the capital gains rate in section 1(h)(1)(D) to 25%. The amendments made by this section apply to taxable years ending after the date of introduction of this Act. A transition rule provides that the preexisting statutory rate of 20% continues to apply to gains and losses for the portion of the taxable year prior to the date of introduction. Gains recognized later in the same taxable year that arise from transactions entered into before the date of introduction pursuant to a written binding contract are treated as occurring prior to the date of introduction.

 

[BLADEMDA]

Backdoor Roth​

There are income limits to contribute to Roth IRAs. In 2021, single taxpayers can’t add money to such accounts if their income exceeds $140,000.
But current law allows for “backdoor” contributions to Roth IRAs. That can be achieved by converting a traditional IRA or Roth 401(k) account, which don’t carry income limits. There are income limits that determine whether contributions to traditional IRAs are tax-deductible or not.
Savers pay tax on the conversions, but their future investment growth and retirement distributions are tax-free.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans such as 401(k) plans.​

The policy would apply at the same income thresholds listed above. It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031.

 

[BLADEMDA]

KEY POINTS

• House Democrats proposed a top federal rate of 25% on long-term capital gains, according to legislation issued Monday by the House Ways and Means Committee. The top rate would be 28.8% when combined with a 3.8% surtax on net investment income.
• The new rate would apply to gains realized after Sep. 13.
• In 2022, it would kick in for single filers with taxable income over $400,000 and for married couples at $450,000, according to a Committee aide.

House Democrats propose raising capital gains tax to 28.8%

The proposal differs from a prior Biden administration plan to raise the top combined rate to 43.4% for those with income over $1 million.

www.cnbc.com

 

[BLADEMDA]

Top earning New Yorkers could face 61.2% combined tax rate under House plan, Californians may face 59% rate

The proposals include a 3% surtax on taxpayers earning more than $5 million a year. They would also raise the top marginal income tax rate to 39.6%.

www.cnbc.com

39.6% top marginal rate for income over $450K (married)

 

[BLADEMDA]

The current top 37% rate kicks in at higher income thresholds than the ones House Democrats have now proposed. In 2021, they apply to single filers and heads of household when income exceeds $523,600 and for married joint filers over $628,300, for example.

House Democrats propose top 39.6% tax rate at these income levels

The proposed reform is one of several that would affect taxpayers with income over $400,000 a year.

www.cnbc.com

 

[GassYous]

Very annoying. They are specifically targetting us to pay for all the money they are throwing around willy nilly. Not sure why I should be paying for childcare for a bunch of low income people instead of my own child?

It's way past time to start fixing climate change and our infrastructure but really? Throw out billions so people can stay in their free homes with free money to spend while they do jack. All on our dime.

 

[linkin06]

saw this yesterday and forgot to post here. posted it on bogleheads and got it taken down i guess for politics? but i think this can affect many of us. they're looking for whales and they're finding us non billionaires.

 

[anonperson]

saw this yesterday and forgot to post here. posted it on bogleheads and got it taken down i guess for politics? but i think this can affect many of us. they're looking for whales and they're finding us non billionaires.

Since it isn't law, bogleheads will remove the post.

 

[Arch Guillotti]

Bogleheads moderation staff is mind-numbingly militant. They still have a great forum though.

 

[dchz]

How likely is this bill to pass??

I now hate the current president and his administration.

 

[GravelRider]

Bogleheads moderation staff is mind-numbingly militant. They still have a great forum though.

Imagine how quickly that forum would devolve into awful and useless threads about politics if they weren’t so militant. It’s probably one of the best forums on the internet because of their strict moderation.

 

[BLADEMDA]

How likely is this bill to pass??

I now hate the current president and his administration.

Some version will become law. You can take that to the bank. Manchin will vote to increase taxes but the corporate rate will go up to to 25-26%. Most of the other changes he will go along with in terms of revenue. This is going to happen so prepare for it.

 

[BLADEMDA]

Contribution limits​

Current law lets taxpayers make IRA contributions regardless of account size.
However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined IRA and defined-contribution plan exceeds $10 million. A defined-contribution plan is a 401(k) plan or other similar workplace savings plan.
The policy’s purpose would be “to avoid subsidizing retirement savings once account balances reach very high levels,” according to a proposal outline.
That limit would apply to single taxpayers with more than $400,000 of taxable income. The threshold would be $450,000 for married taxpayers filing jointly and $425,000 for heads of household.
________

So, your reward for saving and investing is a "cap" on the most money the government will allow you to keep. A savy investor like one of you who works hard and takes lots of extra call gets to pay much higher taxes plus has a limit on his/her IRA/401K plan of $10 million. All these changes because 1 guy made a billion dollars in his Roth IRA.

 

[dchz]

Contribution limits​

Current law lets taxpayers make IRA contributions regardless of account size.
However, the legislation would prohibit individuals from making more contributions to a Roth IRA or traditional IRA if the total value of their combined IRA and defined-contribution plan exceeds $10 million. A defined-contribution plan is a 401(k) plan or other similar workplace savings plan.
The policy’s purpose would be “to avoid subsidizing retirement savings once account balances reach very high levels,” according to a proposal outline.
That limit would apply to single taxpayers with more than $400,000 of taxable income. The threshold would be $450,000 for married taxpayers filing jointly and $425,000 for heads of household.
________

So, your reward for saving and investing is a "cap" on the most money the government will allow you to keep. A savy investor like one of you who works hard and takes lots of extra call gets to pay much higher taxes plus has a limit on his/her IRA/401K plan of $10 million. All these changes because 1 guy made a billion dollars in his Roth IRA.

There has to be a loophole, right? "Rich" people all have a loophole?

 

[Mman]

​

________

So, your reward for saving and investing is a "cap" on the most money the government will allow you to keep. A savy investor like one of you who works hard and takes lots of extra call gets to pay much higher taxes plus has a limit on his/her IRA/401K plan of $10 million. All these changes because 1 guy made a billion dollars in his Roth IRA.

to be fair it is pretty hard to get an IRA or 401K up to >$10M in assets considering the annual contribution limits.

The biggest problem with Peter Thiel's Roth IRA is that he was able to buy non publicly traded shares at a massive discount. That's basically tax fraud in spirit, if not exactly in law. Found your own company, say it is worth almost nothing and you own almost all the shares in your Roth. Then it goes public and gets accurately valued at a massive increase and you owe no taxes on anything.

 

[agammaglobulin]

to be fair it is pretty hard to get an IRA or 401K up to >$10M in assets considering the annual contribution limits.

The biggest problem with Peter Thiel's Roth IRA is that he was able to buy non publicly traded shares at a massive discount. That's basically tax fraud in spirit, if not exactly in law. Found your own company, say it is worth almost nothing and you own almost all the shares in your Roth. Then it goes public and gets accurately valued at a massive increase and you owe no taxes on anything.

If you have a self-directed 401K you can choose your own investments and then roll that into a Roth IRA. So a Roth IRA is not limited by the annual contribution limit. That is part of what they are trying to correct. That said, why should a "rich" doctor not be able to contribute a reasonable amount to a Roth IRA just like everyone else?

High-income individuals already pay way more than their "fair share". The top 10% made 50% of the total income generated in the US but paid 70% of the income taxes. How is that not "fair"? Now they want to tax "the rich" more. When 60% of the population pays zero taxes, it's not such a terrible strategy politically but eventually the "rich" people will move, or at least move their assets.

In my opinion, the tax code in the US is so Fuc*ed up. Just simplify it with no deductions, no credits and just a straight rate. Remember Herman Cain? I think his plans was a '9-9-9' plan. 9% tax on income, sales and corporate tax. Whatever numbers you want to use- having it simplified eliminates so much bull $hit in using loopholes and paying ridiculous amounts of money on accountants and lawyers to find loopholes. At the least it would reduce the $12B we spend on the IRS.

 

[coffeebythelake]

to be fair it is pretty hard to get an IRA or 401K up to >$10M in assets considering the annual contribution limits.

The biggest problem with Peter Thiel's Roth IRA is that he was able to buy non publicly traded shares at a massive discount. That's basically tax fraud in spirit, if not exactly in law. Found your own company, say it is worth almost nothing and you own almost all the shares in your Roth. Then it goes public and gets accurately valued at a massive increase and you owe no taxes on anything.

If the goal of revamping this roth is just because of Thiel, would be a lot easier just to tell Thiel to **** off with his scheme and tax the **** out of him for committing fraud

 

[Mman]

If you have a self-directed 401K you can choose your own investments and then roll that into a Roth IRA. So a Roth IRA is not limited by the annual contribution limit. That is part of what they are trying to correct.

There are still contribution limits. Even with a 401K you are basically putting something like 55K at most into it. $10M is nearly 200x the annual limit of contributions. It's really hard to get there. I have been maxing out for more than 10 years in a raging bull market and am going to end my career nowhere near that.

For your average high earning physician, it's your taxable account that ends up with the highest balance simply because of the unlimited contributions. There is only such much tax deferred you can do per year. I mean even maxing out a defined contribution plan on top of a self directed 401K and you are still looking at maybe 150K per year. Try doing the math on how long it takes 150K contributions to turn into 10M.

 

[nimbus]

There are still contribution limits. Even with a 401K you are basically putting something like 55K at most into it. $10M is nearly 200x the annual limit of contributions. It's really hard to get there. I have been maxing out for more than 10 years in a raging bull market and am going to end my career nowhere near that.

For your average high earning physician, it's your taxable account that ends up with the highest balance simply because of the unlimited contributions. There is only such much tax deferred you can do per year. I mean even maxing out a defined contribution plan on top of a self directed 401K and you are still looking at maybe 150K per year. Try doing the math on how long it takes 150K contributions to turn into 10M.

The limits are actually higher with a CBP. At age 70 one can contribute over $400k pretax.

Contribution Limits » Cash Balance Design

Contributuion limits table: Age401(k) only, 401(k) with Profit Sharing, Cash Balance, Total. To view our 2018 Retirement Plan Limits Postcard, click here.

www.cashbalancedesign.com

 

[deleted126335]

If the goal of revamping this roth is just because of Thiel, would be a lot easier just to tell Thiel to **** off with his scheme and tax the **** out of him for committing fraud

Easy fix for the Thiel's of the world. Limit Roth contributions/holdings to tradeable securities.

 

[Mman]

The limits are actually higher with a CBP. At age 70 one can contribute over $400k pretax.

Contribution Limits » Cash Balance Design

Contributuion limits table: Age401(k) only, 401(k) with Profit Sharing, Cash Balance, Total. To view our 2018 Retirement Plan Limits Postcard, click here.

www.cashbalancedesign.com

but much lower at younger ages, <$100K in the CBP until age 41. Since you don't really have time to compound your largest gains at later ages that greatly impacts how big it can grow. But yes if you want to work until age 75, you can probably get some pretty large balances. Then again since you won't live long past that you probably won't be able to spend it.

edit: and also that is only for CBP which is unrelated to IRA/401K lifetime limits, except in so much as you can convert the CBP to an IRA down the road. IRA and 401K limits themselves prevent almost anyone from getting near $10M under ordinary circumstances.

 

[Arch Guillotti]

Cash balance plans sound great in that you can contribute great big amounts of money but if you are doing that it is likely you are winding down and these plans aren’t really designed to have a raging rate of return. There’s an IRS limit on contributions/account max anyway.

 

[okayplayer]

Cash balance plans sound great in that you can contribute great big amounts of money but if you are doing that it is likely you are winding down and these plans aren’t really designed to have a raging rate of return. There’s an IRS limit on contributions/account max anyway.

Smart groups shut them down every 4-5 years and then you roll over the balance to your 401k and restart the CBP anew.

 

[Arch Guillotti]

Smart groups shut them down every 4-5 years and then you roll over the balance to your 401k and restart the CBP anew.

yep, then you can invest in whatever you want. Just keep the plan long enough to avoid IRS scrutiny.

 

[<(^_^)>]

Interesting to note that two physicians making 300k each would pay more, despite repeated insurance that if you make less than 400k you won’t pay a penny more in taxes etc. as the proposed bracket is 400k individual, 450k married jointly or 225k married filing separately.

 

[raztes]

I suppose another tax savings strategy is to do locums as self employed and max out another 37500 into your solo 401k. This would be in addition to your primary employer’s 37500 contribution. Will locums pay to an LLC or s-corporation?

 

[Arch Guillotti]

I suppose another tax savings strategy is to do locums as self employed and max out another 37500 into your solo 401k. This would be in addition to your primary employer’s 37500 contribution. Will locums pay to an LLC or s-corporation?

Who the hell wants to work more than we already do!

 

[sevoflurane]

Interesting to note that two physicians making 300k each would pay more, despite repeated insurance that if you make less than 400k you won’t pay a penny more in taxes etc. as the proposed bracket is 400k individual, 450k married jointly or 225k married filing separately.

Exactly.

 

[coffeebythelake]

Billionaire Peter Thiel could be forced to pull $5 billion from his retirement account, if House bill passes

House Democrats are taking aim at "mega" IRAs like that of billionaire Peter Thiel in tax legislation unveiled this week.

www.cnbc.com

Thiel is a turd and I hope he is taxed for it

 

[doctalaughs]

While I agree that no one should be able to use a Roth for 5 billion, the other rules are clearly a slap in the face for high income earners (who actually still work for income).

Back door Roth and mega back door Roth probably provide the most benefit to those earning 200-900k (ie doctors).

Meanwhile they leave alone the loopholes benefiting those who make 10 million plus a year, such as carried interest deductions and reclassifying massive management “fees” from income tax to capital gains to be taxed at 15% instead of 40% (strategies employed by hedge fund managers, real-estate magnates, private equity principals etc- ie the “ultra wealthy”). Those people don’t care about the roth back doors as it’s peanuts for them. They have ways to basically forgo taxes on a MUCH more massive scale compared to the rest of us— so who cares.

If most of America was not too dumb to understood these things, it would bring back the guillotine.

 

[Mman]

Meanwhile they leave alone the loopholes benefiting those who make 10 million plus a year, such as carried interest deductions and reclassifying massive management “fees” from income tax to capital gains to be taxed at 15% instead of 40%

current cap gains for those making $10M a year is 23.8%, not 15%, and they are proposing it going higher.

 

[doctalaughs]

current cap gains for those making $10M a year is 23.8%, not 15%, and they are proposing it going higher.

True. But why should a big private equity guy earning 80 million on a deal pay 23.8% whereas a doc making 800k pay 37% on most of that (or more likely 45%with state tax)?

It’s stupid. Closing loopholes for the small fish while letting those with armies of lobbyists do whatever they like.

 

[sevoflurane]

True. But why should a big private equity guy earning 80 million on a deal pay 23.8% whereas a doc making 800k pay 37% on most of that (or more likely 45%with state tax)?

It’s stupid. Closing loopholes for the small fish while letting those with armies of lobbyists do whatever they like.

Agree. Inequality at it’s finest.

 

[anbuitachi]

i dont get why the tax system always punishes people getting married. 400k for individuals but 450 for married?!

 

[anbuitachi]

While I agree that no one should be able to use a Roth for 5 billion, the other rules are clearly a slap in the face for high income earners (who actually still work for income).

Back door Roth and mega back door Roth probably provide the most benefit to those earning 200-900k (ie doctors).

Meanwhile they leave alone the loopholes benefiting those who make 10 million plus a year, such as carried interest deductions and reclassifying massive management “fees” from income tax to capital gains to be taxed at 15% instead of 40% (strategies employed by hedge fund managers, real-estate magnates, private equity principals etc- ie the “ultra wealthy”). Those people don’t care about the roth back doors as it’s peanuts for them. They have ways to basically forgo taxes on a MUCH more massive scale compared to the rest of us— so who cares.

If most of America was not too dumb to understood these things, it would bring back the guillotine.

keeping america dumb is part of their strategy

 

[Mman]

True. But why should a big private equity guy earning 80 million on a deal pay 23.8% whereas a doc making 800k pay 37% on most of that (or more likely 45%with state tax)?

It’s stupid. Closing loopholes for the small fish while letting those with armies of lobbyists do whatever they like.

I don't disagree, just pointing out the actual cap gains rate at this point.

I'm pretty sure in the next 10 years cap gains will be taxed as ordinary income above some arbitrary cutoff (say $200K per year)

 

[narcotics999]

i dont get why the tax system always punishes people getting married. 400k for individuals but 450 for married?!

Because America wants:
1) One parent to take a light job or no job to take care of kids
2) Open up more high-income jobs for others
3) Decrease household income inequality by distributing high-incomers to more families
4) ...

Doctors are not supposed to marry doctors/lawyers/investment bankers/FAANG programmers. Doctor & social worker, Doctor/school teacher, perfect.

 

[<(^_^)>]

Because America wants:
1) One parent to take a light job or no job to take care of kids
2) Open up more high-income jobs for others
3) Decrease household income inequality by distributing high-incomers to more families
4) ...

Doctors are not supposed to marry doctors/lawyers/investment bankers/FAANG programmers. Doctor & social worker, Doctor/school teacher, perfect.

A doctor and social worker quickly becomes a doctor and a stay at home husband/wife. If your household earns either 400 or 450k, that last 50k is going to be taxed at ~45% in many states. So take home is a whopping 27k, not enough to pay for day care for a couple kiddos. Even if someone likes their job, to lose money going to work every day and spend less time with your children is a tough pill to swallow.

It seems like a no brainer to create a tax system that never punishes someone from being married, but here we are.

 

[doctalaughs]

A doctor and social worker quickly becomes a doctor and a stay at home husband/wife. If your household earns either 400 or 450k, that last 50k is going to be taxed at ~45% in many states. So take home is a whopping 27k, not enough to pay for day care for a couple kiddos. Even if someone likes their job, to lose money going to work every day and spend less time with your children is a tough pill to swallow.

It seems like a no brainer to create a tax system that never punishes someone from being married, but here we are.

Agree. Even with a 550k + 150k split, that marginal tax rate is going to make the 150k salary not worth the extra stress on the family. That money is not going to change your lifestyle at all.

 

[nimbus]

Agree. Even with a 550k + 150k split, that marginal tax rate is going to make the 150k salary not worth the extra stress on the family. That money is not going to change your lifestyle at all.

Think how lucky we are when $150k isn’t worth the extra stress.

 

[vector2]

A doctor and social worker quickly becomes a doctor and a stay at home husband/wife. If your household earns either 400 or 450k, that last 50k is going to be taxed at ~45% in many states. So take home is a whopping 27k, not enough to pay for day care for a couple kiddos. Even if someone likes their job, to lose money going to work every day and spend less time with your children is a tough pill to swallow.

It seems like a no brainer to create a tax system that never punishes someone from being married, but here we are.

Where you guys getting 400 for individuals and 450 for married?

Biden’s Tax Plan Could Make ‘Marriage Penalty’ Worse

“Are we better off single?” That’s what some high-earning couples may be asking themselves if Congress acts on President Biden’s tax proposal. Here’s why.

www.google.com

 

[anbuitachi]

Agree. Even with a 550k + 150k split, that marginal tax rate is going to make the 150k salary not worth the extra stress on the family. That money is not going to change your lifestyle at all.

Think how lucky we are when $150k isn’t worth the extra stress.

due to the intrinsic benefits to the child of female anatomy plus the fact that men tend to have higher paying jobs on average, this pushes more women to be stay at home moms, and this will increase media coverage of gender inequality, in family responsibility as well as wage gap.

 

[nimbus]

There are now more women working in the US than men—and these cultural shifts are part of the reason why

As the U.S. economy continues to see consistent job gains, women are now outnumbering men in the U.S. workforce for the first time since 2010, making up 50.04% of payroll jobs.

www.cnbc.com

 

[GassYous]

Think how lucky we are when $150k isn’t worth the extra stress.

I would stress for 150 k more

Then every time I have a ****ty call I regret it

 

[doctalaughs]

IMO sharing 50% of childcare duties (instead of 10-20%) increases my stress level 10x more than working slightly more to make that extra 150k.

Done it both ways- no comparison. Some one has to take kids to appointments, lessons, school pickups, sick calls — and generally this is during work hours.

 

[nimbus]

IMO sharing 50% of childcare duties (instead of 10-20%) increases my stress level 10x more than working slightly more to make that extra 150k.

Done it both ways- no comparison. Some one has to take kids to appointments, lessons, school pickups, sick calls — and generally this is during work hours.

Agree. Anesthesia is soooo much easier than child rearing.

 

[anbuitachi]

Agree. Anesthesia is soooo much easier than child rearing.

really? id rather stay at home, and just drop them off at school in the morning and then pick them up in afternoon... than go to work daily

 

[nimbus]

really? id rather stay at home, and just drop them off at school in the morning and then pick them up in afternoon... than go to work daily

There’s more to it than that. Just wait til you have one