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Ed Slott Says Backdoor roths Are Back on the Menu
Call it a reversal of fortunes . since the spring of last year , ira impresario ed slott has been warning advisors not to counsel investors to create backdoor roth iras — a vehicle that allows even high-income investors to skirt irs income limits to sock away large sums in the attractive , tax-free accounts . slott , the founder and president of ed slott & company llc , had reason to be concerned . He was worried that congress was on the precipice of eliminating backdoor roths , he told nearly 900 advisors who attended Financial Advisor magazine ’ s advisor growth summit in late march . at the time , he was right . last may , the House ways and means committee unanimously passed secure 2.0 — the securing a strong retirement act — and the bill seemed headed for an easy , bipartisan layup in both the House and senate . it was clear that lawmakers wanted to put the backdoor roth ( and the massive tax benefits the workaround creates ) on the extinction list . fast-forward to 2022 , and the legislation is stalled , waylaid by the Build Back Better Plan and looming elections .
“ i said previously don ’ t do backdoor roth iras , but i don ’ t feel that way anymore because the bill never went anywhere ,” slott said .
“ People keep asking , ‘ can we do that ?’ right now , you can . even if secure 2.0 became law , if they want to ban backdoor roths they ’ ll have to do it prospectively as of next January 1 ,” he said .
the backdoor technique allows high-income folks to sidestep the IrS ’ s modified adjusted gross income limits for contributing to a roth IrA .
while investors have to pay income tax on their roth conversions , the assets grow tax-free , making roths one of the last vehicles investors can use to achieve massive tax advantages not only in their lifetimes , but also for their heirs .
To avoid future taxation , the backdoor workaround allows even high-income individuals to make non-deductible contributions to a traditional ira and then immediately convert that account to a backdoor roth ira .
This limits the amount of time the funds have to grow , and if there are no earnings on the contribution , the funds being rolled over will avoid taxes .
The backdoor technique allows high-income folks to sidestep the irs ’ s modified adjusted gross income limits for contributing to a roth ira , which for single filers is under $ 144,000 for 2022 . if you ’ re married and file jointly , your magi must be under $ 214,000 for 2022 to contribute to a roth . in secure 1.0 , lawmakers did away with another tax-advantaged estate vehicle — stretch iras — that allowed investors to pass on their ira assets to heirs , who often then had their entire lifetimes to draw down the assets tax-free . in february , the irs issued more than 750 pages of regulations required by secure 1.0 , creating numerous categories of beneficiaries who now must draw down inherited assets within a 10-year period . The added twist is that now many beneficiaries must also begin taking required minimum distributions in years one through nine . since roths were excluded by the irs from that year-one-through-nine drawdown requirement , the assets can grow tax-free for the entire 10 years . all of these changes make backdoor roths that much more desirable , slott said at the conference .
“ You won ’ t have required minimum distributions even if a roth owner dies well past his required rmd date . That ’ s because the irs specified that any roth owner who dies is deemed to have died before their required beginning date , no matter what age they were ,” slott said .
“ They don ’ t have to touch the assets until the 10th year ,” he added .
The prospect of congress raising tax rates in the future makes roths even more valuable , the cPa added .
— tracey Longo
16 | financial advisor magazine | maY 2022 www . fa-mag . com