Looming crackdown on popular retirement tax strategy worries some investors

The House’s latest proposal makes changes to current laws regarding retirement security. These reforms include preventing individual retirement account holders with more than $ 10 million in savings from continuing to contribute and also being subject to the minimum required distributions. The bill also prohibits IRA investments from having minimum income or asset levels to participate.

The law, if passed, would also repeal Roth conversions for singles earning over $ 400,000 or married couples jointly reporting with incomes over $ 450,000. This provision would apply, if the bill passes, to taxable years after December 31, 2031. Congress is considering changes to the Roth IRAs, particularly after ProPublica reported PayPal PYPL,
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co-founder Peter Thiel had increased his Roth IRA balance from less than $ 2,000 in 1999 to $ 5 billion today.

See: How Peter Thiel Turned $ 2,000 in a Roth IRA into $ 5,000,000,000

“When you look at that [bill]it’s about correcting some perceived abuses in the tax system rather than significantly improving the pension system, ”said Jamie Hopkins, Managing Partner of Wealth Management Solutions at Carson Group. Another bill, known as Secure Act 2.0, aims to promote and encourage retirement savings – this is a sequel to the Secure Act, which was passed in December 2019.

Roth IRAs have income limits. In 2021, singles who earn less than $ 125,000 can contribute the maximum amount ($ 6,000 or $ 7,000 if 50 or older) to a Roth IRA, and what they are allowed to contribute is phased out until that their income reaches $ 140,000. For married taxpayers filing jointly, the threshold is between $ 198,000 and $ 208,000 in 2021.

Conversions are one way for Americans to get around these restrictions. With Roth conversions, Americans can transfer a portion of their traditional IRA balances, which are funded with pre-tax dollars, to a Roth IRA, and pay tax on that distribution at this time. This is a popular strategy for people who anticipate that they will be in a higher tax bracket later in life, or for some, as a way to protect their assets from possible changes in the tax system. tax legislation under President Biden or future administrations.

Enter the Roth 401 (k) plans. Roth 401 (k) plans are the after-tax equivalent of a traditional 401 (k) plan, in that the contribution limits are higher than IRAs and are offered by employers. Withdrawals, as with Roth IRAs, are tax-free (if used correctly). More companies are offering Roth 401 (k) options to their employees than they were a decade ago, and potentially even more employers will be doing so by the time the rules change under the House proposal, Hopkins said.

Also see: How to invest in a Roth IRA like – and unlike PayPal co-founder Peter Thiel

“Most large employers have access to the 401 (k) and Roth 401 (k) plans, and that just wasn’t the case 10 to 15 years ago, so they had to carry out renewals and Roth’s strategic conversions, ”Hopkins said. About three-quarters of 401 (k) plans today have an option for Roth contributions, up from less than half 10 years ago, according to the Plan Sponsor Council of America. “I see no reason for this trend to stop,” Hopkins said.

The proposal will affect top earners more than the average American (the median household income in 2021 was $ 67,521, according to the US Census Bureau), and has the potential to have a “significant impact” on wealth creation. long term because of the benefits of the Roth IRA. tax-free growth, said Jody King, director of financial planning at Fiduciary Trust.

Roth 401 (k) plans are a good way to multiply tax-free growth as well, but few people are taking advantage of these vehicles, King said. “They don’t want to pay taxes up front,” she said. “If they can’t do a conversion later, do the Roth 401 (k) now.”