Last week in October the Backdoor Roth IRA and Mega Backdoor Roth including the Mega Backdoor Roth Solo 401k had been removed from the Pending Reconciliation Bill Build Back Better Act of 2021. While the new pending legislative text has not yet been released to the public, today, November 3, 2021 the provisions to ban the backdoor Roth and the mega backdoor Roth have been added back.
Mega Backdoor Roth Including Mega Backdoor Roth Solo 401k Ban is Back!
As in the initial draft of the bill, the latest draft would ban making voluntary after-tax 401k including voluntary after-tax solo 401k contributions starting January 1, 2022, which means the last day to both make voluntary after-tax 401k including voluntary after-tax solo 401k contributions and to convert the voluntary after-tax contribution to a Roth IRA or the Roth 401k designated account would be December 31, 2021. If enacted, this provision would apply regardless of the taxpayer’s income level.
Ban of After-Tax IRA Contributions & Backdoor Roth IRA Conversions in 2022
Just like voluntary after-tax 401k contributions, both after-tax IRA (non-deductible IRA) contributions and the conversion of after-tax IRA contributions would no longer be allowed effective January 1, 2022.
Ban of Roth Conversions in 2032
The new legislation also includes the prior ban of pre-tax to Roth conversions for both IRA and 401k plans starting in 2032 for high-income taxpayers (i.e. income greater than $400k for single taxpayers (or $450k for married taxpayers filing jointly)).
More Time for New RMD and Contribution Limit for High-Income Taxpayers with $10MM-plus in Retirement Accounts
The new legislation re-introduces the new required minimum distribution requirement for high-income taxpayers with large retirement account balances (in excess of $10MM) but extends the effective date to 2029. Similarly, the new legislation also extends the effective date of the proposed limit on contributions for such high-income taxpayers with large retirement account balances to 2029.
Some Good News, However for Accredited Investments
This latest round of legislation does not prohibit IRAs from investing in private investments where the private investment sponsor requires the IRA owner to be an accredited investor (i.e., have a certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential). Under the initial bill proposal, IRAs holding such investments would have lost their IRA status. Lastly, just as before, the latest version of the bill also does not prohibit 401k plans including solo 401k plans from investing in private investments.
More Good News for IRA LLCs
In addition, the latest round of legislation does not include the ban on IRA investments in an entity in which the IRA owner is an officer/director which would have effectively banned IRA LLCs