What the Current Tax Proposals Mean for Roth Conversions and Why Now Is the Time to Act

After months of back and forth between members of Congress, progress is being made on the Administration's sweeping economic plan, President Biden recently signed the traditional infrastructure bill into law and Congress is now contemplating the social safety net programs included in the Build Better Back Act. Since being introduced, many components of that bill's original funding framework have been changed, tweaked or eliminated. For example, it appears that proposals to increase ordinary income and capital gains tax rates are now off the table. Changes to the estate and gift tax exemption amounts and grantor trust rules have also been scrapped, along with a list of other proposals.

Still included in the Build Better Back Act, however, are proposed changes governing Roth conversions. Below, TIAA wealth planning experts Jonathan Fishburn and Colleen Carcone, CFP® share their insight on steps you can take before year end to help manage your tax exposure.

Certain Roth provisions impact all taxpayers

Proposed elimination of conversions for after-tax dollars in traditional IRAs and employer-sponsored plans

Jonathan Fishburn, Director of Wealth Planning Strategies at TIAA, points out that the new legislation includes two important proposed changes for Roth conversions. The first eliminates all conversions of after-tax IRA and qualified plan contributions, effective January 1, 2022, regardless of the taxpayers' income level.

The proposed elimination of all conversions of after-tax dollars in traditional IRA accounts beginning in 2022 impacts taxpayers, regardless of income.

This includes "back-door" Roth conversions where higher income earners make non-deductible IRA contributions, up to the maximum allowable for a given tax year and then convert it within the same year without income tax consequences. Previously, this was a way to get around the income limitations on Roth contributions.

"However, it's important to understand that it's not just the "back door" conversions that will no longer be allowed, but the conversion of all after-tax or non-deductible contributions," Fishburn says.

If the bill passes, taxpayers seeking to convert after-tax contributions will need to act fast.

Conversions of after-tax contributions must be completed by December 31, 2021

This impacts taxpayers who may have been phased out of making deductible contributions to an IRA and made non-deductible contributions to bolster their retirement savings. Some employer sponsored plans allow non-deductible contributions as well. If the bill passes, taxpayers seeking to convert after-tax contributions to a Roth will need to act fast, since the conversion must be completed by December 31, 2021.

Since there are income tax implications when converting to a Roth, be sure to speak with a tax professional and your financial advisor before taking action.

Proposed elimination of conversions of both pre-tax and after-tax dollars for high income taxpayers

The second proposed change eliminates all Roth conversions for high income taxpayers, which will take effect 10 years from now, on January 1, 2032. According to Colleen Carcone, CFP®, Director of Wealth Planning Strategies at TIAA, high income taxpayers—defined as single filers with more than $400,000 in taxable income or over $450,000 for married couples filing jointly (indexed for inflation)—will want to develop a plan now for how they will convert their assets over the next 10 years.

Ongoing planning opportunities

While the proposed limitation on Roth conversions for high-income taxpayers will not go into effect until 2032, Carcone says that taxpayers in traditional IRAs and employer-sponsored plans who are planning to convert assets to a Roth account in the future need to begin working with their advisor now to put a plan in place for how they will convert these assets over the next 10 years.

Roth conversion changes

What could change?

Elimination of the ability to convert after-tax dollars to Roth accounts

  • Beginning in 2022

Elimination of all conversions for high earners

  • Beginning in 2032

Who would be impacted?

All conversions of after-tax contributions to Roth accounts will be disallowed regardless of income

High income taxpayers would not be allowed to convert any dollars beginning in 2032

  • Single taxpayers >$400,000
  • Married taxpayers >$450,000

What can you do now?

Conversion of after-tax contributions should be completed by the end of 2021

High income taxpayers should consider conversion within the next 10 years

What does this mean for you?

As we wait to see if the Build Back Better Act passes, if you have after-tax contributions in a retirement account, be sure to reach out to your tax and financial advisors to discuss whether you should take action now, before the opportunity to convert your after-tax dollars is gone. Taxpayers seeking to convert after-tax contributions to an IRA or qualified plan will have to complete the conversion by December 31, 2021, should this legislation pass.

How a TIAA advisor can help

While TIAA does not provide tax or legal advice, a TIAA advisor can help coordinate the advice you receive from all of your professional advisors to update your planning and help ensure the advice you receive is aligned with your goals and time frame.

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Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.