The 2016 Retirement Landscape: 5 Predictions

A Clampdown on the Backdoor Roth

The backdoor Roth conversion is on the way out, so take advantage of it while you can. Probably not during this presidential election year, but if and when Washington gets around to major tax reform, the backdoor Roth will be on the chopping block. President Obama recently proposed ending the backdoor Roth as part of his 2017 budget plan.

Backdoor conversions make no sense in the context of the broader income-eligibility rules for IRAs. Joint filers who wish to contribute directly to a Roth are subject to an adjusted gross income limit ranging from $183,000 to $193,000 this year. But the sky’s the limit for conversions–the so-called backdoor Roth.

A clampdown on the backdoor Roth would mean less near-term tax revenue for the government, since income taxes are paid at the time of conversion. Theoretically, it would generate more revenue down the line, since would-be-converted amounts would continue to grow in traditional IRAs, with taxes due at the time of withdrawal.

Roth conversions aren’t right for everyone, but they can be very helpful as a way to diversify retirement holdings for tax purposes. Doing at least some Roth conversion makes sense–perhaps just enough to “top off” your tax bracket, if you can fund the tax liability from sources other than your IRA. Clampdown or not, it makes senses to plan based on what we know today, not on what might happen down the road.

*The quotation often is attributed to Berra, but it may actually have been Mark Twain or perhaps a Danish physicist. Regardless, it’s true, no matter who said it.

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