Have you been wondering if the Backdoor and Mega Backdoor Roth IRA tax loopholes were going to end? I’ve got updates on what I’ve learned about regular IRA and 401k to Roth IRA conversions!
-Backdoor and Mega Backdoor Roth IRA Conversion Steps
-Proposed Law Changes To Roth IRA Conversions
-The 3 Contribution Types To 401k
-Why Maxing Out The 401k Is Ideal
-Are After-Tax Contributions The Same As Roth Contributions?
-When Will Roth IRA Conversion Tax Law Changes Take Effect?
-Who Is Affected If These Tax Laws Change?
The great news is that we can still do Backdoor Roth IRA and Mega Backdoor Roth IRA conversions in 2022. The proposed law changes that would have limited certain types of Roth IRA conversions were slated to begin in 2022, but since the Build Back Better Act got stalled in the Senate, everything is staying status quo for now.
What was initially worrisome was when I saw this proposed change in Sec. 138311. on Tax Treatment of Rollovers to Roth IRAs and Accounts: “Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.”
For years I used to think of “Roth” contributions as “after-tax” because you contribute money that has already been taxed to either a Roth IRA or a Roth 401k. However, in doing further research, I realized there are three contribution types to a 401k.
The 3 types of contributions people can make to a 401k are: 1) Pre-Tax, 2) Roth, and for some, 3) After-Tax.
That’s right, apparently After-Tax is NOT the same as Roth. I share Fidelity articles and another source confirming that this slightly confusing term of After-Tax is distinct from Roth contributions to a 401k.
In 2022, for elective deferrals/contributions to a 401k, the current limits for Pre-Tax or Roth are:
$20,500 if you’re under 50
$27,000 if you’re over 50
Your employer could choose to match or not match, and contribute some funds to your 401k if they want. Beyond that, if you are among the one out of five who have a 401k plan that allows for the additional After-Tax contribution type, you could potentially contribute a total of $40,500 to the 401k, for a grand total of:
$61,000 if you’re under 50
$67,500 if you’re over 50
Most of us, sadly, cannot contribute more than elective contributions if we don’t have one of those extra special 401k plans with the extra After-Tax feature.
However, if you are able to contribute After-Tax to 401ks, be sure to know that “withdrawals of after-tax contributions would be tax-free, but any earnings on the after-tax contributions would be taxed as ordinary income,” per Fidelity.
The ideal thing is if you could fully, totally max out the 401k every year, and then eventually roll the $61K/per year contributed in the 401k into a Roth IRA, and continue to generate tax-free earnings for the rest of time.
So it looks like the proposed tax law changes would have only affected the extra After-Tax contribution type to the 401k, not the normal elective deferral contributions of Pre-Tax or Roth. Therefore, we should still continue to be able to roll over Roth 401k contributions into a Roth IRA, even if the current versions of the proposed tax law changes go into effect by 2023 or beyond.
But make sure you check with a professional to be absolutely sure for any of your retirement and tax planning needs.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
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