How to tell if a Roth IRA backdoor makes sense to you

A popular retirement savings tactic is on the chopping block in Congress, and investors are eyeing the strategy before it goes. But there are other things to consider before making any changes, say financial experts.

Currently, investors can bypass the income limits of a Roth individual retirement account using a so-called backdoor maneuver.

Investors can make what are known as non-deductible contributions to their traditional IRA before converting the funds to their Roth IRA. Future tax-free growth can be attractive if they expect a higher bracket in retirement.

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House Democrats want to crack down on the after-tax backdoor strategy, regardless of income level, after Dec.31, according to a summary from the House Ways and Means Committee.

While some investors are eager to finalize the move before the end of the year, advisers call for caution, especially with the evolving legislation.

“It’s one of those things you can’t stare at in a vacuum,” said Marianela Collado, Certified Financial Planner and CPA at Tobias Financial Advisors in Plantation, Fla., Explaining that investors need to take a holistic approach. .

Roth conversions can trigger levies on contributions or pre-tax profits, so investors will need a plan to cover the bill.

“You need to be aware of the taxes you are going to have to pay, depending on the conversion,” said Ashton Lawrence, CFP at Goldfinch Wealth Management in Greenville, South Carolina.

Additionally, a person willing to pay upfront taxes on a Roth conversion may need to predict how many years it will take before breaking even, Collado said.

However, some investors opt for taxable Roth conversions in low income years or other deductions to offset the drawdowns.

While Roth IRAs generally offer tax-free and penalty-free withdrawals at any time for contributions, there is an exception for conversions, known as the “five-year rule.”

Investors must wait five years before they can withdraw converted balances, regardless of age, or they will incur a 10% penalty. The timeline begins January 1 of the year of conversion.

Another possible downside to a Roth conversion is the potential for increased adjusted gross income this year, which can cause other problems, Lawrence said.

“It’s like a ball,” he explained. “If you squeeze it at one end, you’re going to inflate it somewhere else.”

For example, Medicare Part B and Part D base monthly premiums on adjusted adjusted gross income from the previous two years, which means that 2021 income may result in higher costs in 2023.

A person with a modified adjusted gross income greater than $ 88,000 ($ 176,000 for joint filers) will have an additional surtax each month, known as the monthly income-related adjustment amount or IRMAA.

In 2021, the additional costs for Medicare Parts B and D could reach $ 504.90 and $ 77.10, respectively.