Thinking through strategies and key actions for potential retirement plan changes is never a bad idea.
While we mostly avoid speculating on what the future may hold when it comes to retirement legislation and tax changes, we do believe that exploring this topic is prudent.
No matter what the proposed legislation has in it, the final bill will likely be different. However, with what we know now, we can start to proactively get ahead of things (if needed).
Read on to learn more about the two bills to really keep an eye on.
Build Back Better (BBB) Act
The Build Back Better (BBB) Act is the lesser probability of the two bills in terms of it being fully enacted. However, there are a few key provisions related to IRAs of importance for retirees.
Backdoor Roth Conversions
BBB aims to completely eliminate backdoor Roth Conversions, no matter a taxpayer’s income level.
Put simply, a backdoor Roth Conversion is the act of making a non-deductible contribution into a Traditional IRA and subsequently converting those funds into a Roth IRA. Because there are no income limits associated with non-deductible Traditional IRAs, high-income earners are able to utilize this strategy with the current tax law.
Mega Backdoor Roth Conversions
The strategy of a mega backdoor Roth Conversion is associated with employer retirement plans (usually a 401(k)) that allow for after-tax contributions. If an employer plan has this “feature”, employees can contribute after-tax funds into their 401(k) (for example) over and above the IRS contribution limits for employee deferrals, employer matches, and employer contributions. The employee would then convert the after-tax funds into their Roth IRA.
For 2022, this could total up to $61,000 put into an employer plan in a single tax year.
For both backdoor Roth Conversions (non-deductible IRAs) and mega backdoor Roth Conversions (employer plans), it may make sense to hold off on proceeding with either until it is confirmed if they are allowed in 2022.
Roth Conversions For Higher-Income Earners
The potential provisions noted above would be effective in 2022 if passed. However, with BBB, there is a specific provision targeted at higher-income earners that would not be effective until 2032.
This provision looks at normal Roth Conversions (i.e. pre-tax IRA converting into Roth IRA) and bans them for taxpayers with annual income above these levels (depending on filing status):
$450,000 (Married Filing Jointly)
Even though this provision is not set in stone and will be effective 10 years from now, it may make sense to think more seriously about doing Roth Conversions over this time period (especially if you expect to be above those income thresholds).
The Securing A Strong Retirement Act Of 2021 (Secure 2.0)
The Secure 2.0 Act is actually more likely to be enacted than BBB. This mainly has to do with having already passed out of committee and the fact that it does have full bipartisan support.
There is a lot going on in this piece of legislation, but the most impactful proposed changes include the following:
Increase in age at which RMDs begin. SECURE Act changed the age from 70 ½ to 72 and SECURE 2.0 looks to increase the RMD age to 75.
Indexing of IRA catch-up contributions (based on inflation)
Increased limits on catch-up contributions to 401(k)s for those age 62, 63, or 64
The allowance for matching contributions from employers on student loan payments
Allowing SIMPLE IRAs and SEP IRAs to have Roth provisions within them.
A Minor Note On RMDs In 2022
While this public service announcement is not related to the bills noted above, RMDs are an important consideration as we look ahead into 2022.
First, retirees need to be clear on whether or not they actually have an RMD due in 2022. With a few new provisions related to RMDs over the past few years and the “skipping” of RMDs due to the CARES Act in 2020, there still seems to be confusion for some retirees.
For more details on the RMD changes over the past few years, mostly due to the SECURE Act, you can read through this article we put together on the topic.
Finally, with regards to RMDs, be prepared for likely higher amounts due to the broadly higher returns in the stock market for 2021. With a larger RMD comes higher taxes due!
How We Can Help
Financial planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on.
At Abel Financial Management, we are local, family-oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.