Backdoor Roth IRA Conversions: What You Need to Know For 2022

Some changes are coming for converting your traditional to a Roth IRA as part of the Build Back Better Bill that the U.S. House approved in November 2021. If you are considering a ‘backdoor’ Roth IRA conversion or are curious about what it is, this article will help you understand the changes coming to this strategy starting in 2022.

How a Roth IRA works:

Roth IRAs are funded with after-tax dollars, and withdraws later are federal tax-free, regardless of how much your investment has gained. With investors required to pay taxes on their pre-tax contributions and accumulation in other types of retirement savings vehicles. The Roth IRA is an option that offers a tax-free benefit to qualifying investors.

Roth IRAs have income limits for those who wish to invest in a Roth IRA retirement savings account. Single people with an adjusted gross income (AGI) greater than $140,000 in 2021, and married couples filing jointly, who made more than $208,000 in 2021, were blocked from directly contributing to a Roth IRA per IRS rules.

For 2021, Roth IRA limits were $6000 for investors under age 50 and $7000 for investors over age 50. Roth IRA contribution limits will be the same for 2022.

What is a Backdoor Roth IRA conversion?

Investors making more than the Roth IRA limits have used a strategy called a ‘back door’ Roth IRA conversion since 2010. Backdoor Roth IRA conversions are beneficial to high earners. Whose annual income (plus access to workplace retirement plans) makes them ineligible for tax deductions. For traditional IRA contributions or unable to contribute to a Roth IRA.

To do a backdoor Roth IRA conversion, you open a new traditional IRA, make nondeductible contributions, and convert it into a Roth IRA. Although you still need to follow the annual IRA contribution limits, there are no income thresholds. Anyone can convert traditional IRAs to Roth IRAs, regardless of annual income.

Things to consider about Backdoor Roth IRAs:

• A Backdoor Roth IRA may incur higher tax when established. But the investor will receive the future tax savings of a Roth account.
• Backdoor Roth IRA conversions are a strategy for assets initially contributed to a regular IRA, that is now in a Roth IRA after an IRA conversion.
• A Backdoor Roth IRA is a legal way to get around the income limits. That usually prevent high earners from contributing to a Roth IRA.
• If you are considering a Backdoor Roth IRA, be aware that the U.S. Congress may pass legislation that would reduce some of its benefits after 2021.
• Additionally, the use of Roth IRA conversions by high-income taxpayers would eliminate in 2032 if passed.

Now is a great time to visit with your financial professional if you are considering backdoor Roth IRA conversions.

SWG1945807-1221. This article is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives.

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