backdoor roth ira 2022

ROTH IRA BACKDOOR FOR 2022

The Backdoor Roth IRA is still alive and well! The plan to eliminate the Backdoor Roth IRA effective January 1, 2022 will not be enacted in 2021, since it is evident that the Build Back Better legislative agenda will not be adopted anytime soon.

But, what if the proposition reappears in 2022? In the current atmosphere of uncertainty, how can one perform financial planning in this regard?

Below, I outline how I approach the question of whether a backdoor Roth IRA should be executed in early 2022. The following is my take on the various scenarios that may occur. They are but one person's viewpoint in the midst of a potentially volatile circumstance.

Nothing on this page should be construed as tax advice for any particular taxpayer.

Making Provisions for Uncertainty

To address the question of whether to open a backdoor Roth IRA in early 2022, I feel it is better to develop a hypothetical scenario and then weigh all of the (now known) alternatives in terms of legislative changes and their likelihood of occurring. 

In 2022, Single Nurse is 35 years old, single, and earns $170,000 on her W-2. At work, she has a 401(k) plan. She won't be able to contribute to a Roth IRA in 2022 because of her modified adjusted gross income ("MAGI"). A single nurse contributes $6,000 to a conventional IRA on January 1, 2022.

A single nurse switches her whole traditional IRA balance of $6,230.00 to a Roth IRA on January 5, 2022. On December 31, 2022, if a single nurse does nothing more, she will have $0 in all standard IRAs, SEP IRAs, and SIMPLE IRAs. Read more here.

backdoor roth ira step-by-step

What is it and how do I create one?
Even if your salary is too high for a Roth IRA, a backdoor Roth IRA allows you to convert a traditional IRA to a Roth.
A step-by-step approach to converting a backdoor Roth IRA may be found here:
Set money aside in a regular IRA. You may already have an account or may need to establish and fund one. (See our recommendations for the top IRA providers if you need to start an account.)

1. Invest in a Roth IRA by converting your contribution. The instructions and paperwork will be sent by your IRA administrator. During the conversion procedure, if you don't already have a Roth IRA, you'll create one.
2. Get ready to pay your taxes.  So, if you deducted traditional IRA contributions and subsequently converted your traditional IRA to a backdoor Roth, you'll have to forfeit that tax benefit. 
3. Prepare to pay income tax on the money you converted to a Roth when it's time to submit your tax return. Also, read below for more information on the pro-rata rule, which has a huge impact on your tax bill.
4. Prepare to pay taxes on your conventional IRA profits. If the money in your conventional IRA has been sitting there for a while and there have been investment gains, you'll owe tax on those gains when it comes time to file your taxes. Find out more about tax-advantaged investments.

Keep the regulations in mind.

To avoid fines, remember the following rules:
Transfers of many kinds
One of the following conversions is required:

• A rollover is one in which you receive funds from your IRA and deposit them into your Roth account within 60 days                                       

• This is known as a "same trustee transfer," in which funds are transferred from an IRA to a Roth account at the same financial institution.

Is a Roth IRA with a backdoor worth it?
A backdoor Roth IRA is probably not a good idea if...

• Only money from your IRA withdrawal can be used to pay the taxes owed. Not only are you risking losing any future investment gain on that money, but you're also risking having to pay the 10% early withdrawal penalty if you're under the age of 59-1/2.
• In five years or fewer, you'll require the funds. Money transferred from an IRA to a Roth IRA is subject to the Roth five-year rule, which states that if you don't remove it within five years, you may incur taxes and a 10% penalty.
• Withdrawing money from your IRA will put you at a higher tax rate. It's usually a good idea to convert just enough to avoid having to pay a higher tax rate that year.

Because the Backdoor Roth is being targeted by Congress, you may wish to consider other options.

roth conversion deadline

Converting a Traditional IRA to a Roth IRA A Roth conversion occurs when assets are transferred from a traditional, SEP, or SIMPLE IRA (collectively referred to as a traditional IRA in this article) or a qualified employer-sponsored retirement plan (QRP)—such as a 401(k), 403(b), or governmental 457(b)—to a Roth IRA.When you convert your pre-tax savings into regular income, you avoid the IRS's 10% additional tax for early or pre-59 1/2 withdrawals (10 percent more tax) on your taxes now in exchange for the advantage of tax-free potential Roth IRA growth later.

The following are examples of investment and insurance products:

• It is not a deposit or other obligation of the bank or any bank affiliate, nor is it guaranteed by the bank or any bank affiliate.

• Investment risks exist, including the possibility of losing the principal amount invested.

will backdoor roth be eliminated

Many backdoor Roth conversion schemes, particularly mega conversions, would be initially limited—and subsequently eliminated—by the BBB law. If passed, tax reforms set to take effect between 2022 and 2032 will make it impossible to employ Roth IRAs and Roth 401(k)s to build up large funds that are tax-free indefinitely. New administrative procedures, such as enhanced information reporting and income tax withholding, would also make it easier for the IRS to enforce retirement programs more effectively.
The BBB bill would completely abolish Roth IRA and Roth 401(k) conversions for high-income taxpayers after December 31, 2031. Individuals with modified adjusted gross incomes of more than $400,000 for single taxpayers and married people filing separately, $450,000 for married people filing joint returns, and $425,000 for heads of households are considered high-income taxpayers. Inflation would be factored into the high-income criteria.