Eliminating Roth Income Restrictions

Taxpayers whose income exceeds certain threshold amounts are prohibited from contributing directly to a Roth IRA (taxpayers with income above $165,000 (single filers) or $246,000 (joint returns) are completely prohibited from directly funding a Roth account in 2025). While those taxpayers cannot directly fund a Roth IRA, they are entitled to use a “backdoor” strategy where they fund a traditional IRA and convert those funds to a Roth (paying income tax at the time of conversion). When Congress passed the 2017 tax reform legislation, they “blessed” this backdoor in their committed report related to the legislation. Now, proposals have been floated to eliminate the income restrictions on direct Roth IRA funding.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the income restrictions on Roth IRA contributions should be eliminated.

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

Their Votes:





Their Reasons:

Byrnes: The income restrictions that prohibit higher-income taxpayers from contribution to Roth IRAs are completely pointless and should be eliminated entirely. First of all, the rules are overly complicated. They depend on an individual's marital status as well as the taxpayers' ability to contribute to an employer-sponsored plan. These rules only serve to overcomplicate an already complicated tax code—creating room for errors based on rules that are entirely unnecessary.

Bloink: The Roth IRA contribution income restrictions exist for a very good reason. Roth accounts were not created to give the wealthiest taxpayers yet another tax loophole. When the taxpayers fund a Roth account, the earnings on the after-tax contributions to that account grow tax-free regardless of how high the account value becomes. That gives the wealthy free range to shelter their investment earnings and never pay tax on those earnings.

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Byrnes: The Roth income restrictions also do nothing to prevent higher-income taxpayers from contributing to Roth IRAs. Instead, higher-earning taxpayers are forced to execute a series of transactions whereby they convert traditional funds to Roth funds. These transactions would be completely unnecessary if they were just permitted to contribute directly to the Roth account. The end result is exactly the same.

Bloink: Roth retirement accounts are given tax preferences because we want to encourage taxpayers to save for retirement. Allowing the wealthiest taxpayers to funnel all of their earnings into Roth accounts would just provide another method for those super rich Americans to avoid paying their fair share of federal income tax—and removing the income limits would do just that: give the super-rich yet another way to shelter their investments to avoid paying federal income tax.

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Byrnes: As we’ve seen in recent years, restricting Roth contributions based on a taxpayer’s annual earnings does absolutely nothing to prevent taxpayers from amassing huge fortunes within the Roth account. Investor Peter Thiel managed to amass $5 billion in a Roth account over two decades. All the income restrictions accomplish is requiring higher income taxpayers to execute workaround transactions to accomplish the same funding goal.

Bloink: Sure, we all know that wealthy taxpayers can circumvent the Roth income restrictions and fund their accounts through the back door. Still, that doesn’t mean we should use the tax code to encourage wealthy taxpayers to shelter investment income via the Roth strategy. If the current rule makes it more difficult for the wealthy to shelter their investment income, that’s for a reason—we don’t want to be giving the ultra-rich yet another way to avoid paying their fair share.