High-income clients are prohibited from contributing directly to a Roth IRA. Instead, those clients often fund a traditional IRA and convert the traditional IRA to a Roth. This strategy has become known as the backdoor Roth IRA strategy.
While the legislation has not become law, the Build Back Better Act was set to eliminate the backdoor Roth IRA strategy as of Jan. 1, 2022. Because it remains possible that the legislation (or some version of the legislation) could be put to a vote this year, many clients wonder whether it's still OK to execute a backdoor Roth strategy in 2022.
We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about using a backdoor Roth IRA in 2022.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Byrnes
Bloink
Their Reasons:
Byrnes: Congress has yet to take any type of tangible action that would limit or prohibit the use of backdoor Roth IRAs for any client, regardless of income. However, the action has been threatened and seemed to have significant support late in 2021 — meaning that we could see real legislative change soon. High-net-worth clients should act now to take advantage of a potentially limited window of opportunity to create a tax-free source of retirement income in later years.
Bloink: Roth IRAs were meant to provide a way for hardworking Americans to create a source of tax-free income in retirement — not as a loophole to allow wealthy taxpayers to exploit the tax code. While that's often how these backdoor Roth IRAs are used (to get around the income restrictions that apply to Roths), it wasn't the intent. High-net-worth clients should be wary of potential future challenges and restrictions on the backdoor Roth strategy and, conservatively, should hold off on funding a backdoor Roth until we know more about any new legislative proposals.
