As of late January 2022, the backdoor Roth IRA is still an option. But some experts are saying if you plan to execute a backdoor or mega backdoor Roth, now is the time.

You might have heard that part of the Build Back Better bill included closing the ability to contribute to a backdoor Roth IRA, which has been a nice tax-savings maneuver for many high-income individuals and households.

While this portion of the bill did not pass in late 2021, there is a possibility that Congress will take another stab at it in 2022.

The Backdoor Roth & Mega Backdoor Roth IRA Explained

The backdoor Roth IRA is a way for high earners to circumvent the restrictions on making Roth IRA contributions. In 2022, anyone (single or head of household) earning an annual income of $144,000 or more isn’t allowed to directly contribute to a Roth. Likewise for those who are married filing jointly with an income of $214,000 or more.

But a backdoor Roth IRA allows these high earners to slip in contributions by first contributing to a nondeductible traditional IRA, then converting it to a Roth (hence the term backdoor Roth conversion). High earners can also roll traditional 401(k) contributions into a Roth or transfer it into the ROTH portion of their 401(k). When previously non-taxed funds (pre-tax dollars) are rolled into the Roth IRA or transferred to the ROTH portion of your 401(k), you’ll pay income taxes.

A mega backdoor Roth conversion applies the same principle with additional tax benefits. By allowing you to roll over your after-tax contributions from a traditional 401(k) to a Roth IRA using in-service withdrawals or in-plan conversions, it significantly reduces or eliminates entirely any tax liability on the conversion. Because after-tax 401(k) limits are much higher than contribution limits for an IRA, this allows you to convert more of your income to a Roth, despite the income limits.

Should you execute a backdoor Roth conversion in 2022?

It’s impossible to know exactly what will happen, but if Congress does try again to pass a version of the Build Back Better bill this year that imposes a ban on the backdoor Roth, there are a couple of different potential scenarios.

If it does pass, it’s possible it could take effect immediately, but may not be retroactive to the first part of 2022. Restrictions may also not be effective until next year. It’s also possible that, once again, the bill does not pass in the Senate.

If you have the funds and you know you’ll be above the income threshold, then converting to a backdoor Roth could be a good way to boost your retirement savings early in the year, before the potential changes to the law.

However, the mega backdoor Roth is a complex strategy that isn’t suitable for every investor. There are risks, and just as with retirement planning or investment strategy, it’s best to weigh the pros and cons with your wealth advisor in light of your financial plan.

Want to find out more about which tax-efficient investing strategies may be right for your situation? Contact us for a personalized approach to wealth management.