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It's alive (or is it?): the backdoor Roth strategy


Update 11/4: eh, maybe not

If you heard a cheer in the far-off distance last night, it was probably me and my advisor friends expressing a collective sigh of relief that a valuable retirement savings strategy many of us have been encouraging our clients to use will live to see another day.

In August, the House Ways and Means Committee approved its portion of the original Build Back Better bill, including provisions that would have done away with the possibility of converting after-tax balances in pre-tax accounts to Roth accounts, a strategy known as the back-door Roth (or mega backdoor Roth when executed inside a retirement plan, where the limits on contributions are higher than in an IRA). Those of you who have worked with me know I like to build tax diversification into your plans, and this strategy represented really the only way to accumulate Roth savings for many people. So losing the possibility of doing that starting next year would have meant missing out on a hedge against what future tax law will look like.

Fast forward to last night, through many tortuous weeks of Congressional back-and-forth, and we have a new framework for what is still being called the Build Back Better bill. It’s at most a distant cousin (in the They Might Be Giants sense) of its predecessor, and is massively scaled down, but it apparently has enough support to pass. What got left behind: the Roth conversion provisions.

So for now, we can say that rumors of the demise of the Roth conversion, like that of Mark Twain long ago, were greatly exaggerated. Of course, it’s not law yet and changes can still occur; also, the provisions could come back in a future piece of legislation, namely the Secure Act 2.0, which has been hanging out in the wings waiting to be reanimated.

So ultimately, everything stays as it was for the moment. It’s good news for sure, but I think the takeaway is that everything changes all the time, and it can change quickly. You can’t assume that something you’re able to do this year will still be available next year, or in 10 years. And maybe new and better ideas and strategies will emerge in the meantime. Assessing the landscape regularly, making sure you’re taking advantage of what’s available right now, aligning your money moves with your life goals, and staying flexible remain the guiding principles behind creating and maintaining a successful plan.

There is, of course, much more to the bill than this. But it’s such a directly relevant topic to so many of you that I thought it would warrant a post on its own.

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