The Biden Administration’s Fiscal Year 2025 Budget Proposal has once again resurrected a potential ban on the “Mega Backdoor Roth” strategy. Let’s dive into the history of this proposal and what it could mean for your retirement planning.
- Click HERE to join a Live Q&A on Friday 3/15/2024 at 10:30 am Pacific/2:30 pm Eastern [Click the same link for a Recording link if you can’t make the live session.] as we discuss the Biden Administration’s recent proposal to ban the Mega Backdoor Roth strategy and what it means for your retirement planning.
Video Slides: Proposed Ban
Background and History
The Mega Backdoor Roth strategy first came under scrutiny by the Biden Administration in 2021 when a proposed ban was included as part of the Build Back Better Act. This proposal was largely in response to the revelation that billionaire Peter Thiel had accumulated a staggering $5 billion in his Roth IRA. However, the 2021 ban was never enacted as the Build Back Better Act stalled in Congress.
Subsequently, the Biden Administration included the ban once more in their Fiscal Year 2024 Budget Proposal. Again, the proposal did not gain traction and was not implemented.
What the 2025 Budget Proposal Says:
While the language of the most recent proposal primarily focuses on banning the “Backdoor Roth IRA”, given the proposal’s history, it’s reasonable to conclude that the language of any legislation that is ultimately put forth would also encompass Mega Backdoor Roth 401(k) plans.
The Mega Backdoor Roth strategy involves making a non-deductible after-tax contribution to a 401(k) plan and then subsequently converting those funds into a Roth account, either within the 401(k) or by rolling the funds over to a Roth IRA.
Political Landscape and Timing:
Despite the Biden Administration’s persistent attempts to close this perceived loophole, Republicans in Congress have declared the proposal “dead on arrival.” With a divided government, any negotiations on the budget will not commence until the Fall of 2024, and the outcome will largely depend on the results of the upcoming elections.
Planning Opportunities:
For those currently utilizing or considering the Mega Backdoor Roth strategy, there is still time to make contributions for the 2023 and 2024 tax years, even if you don’t already have a plan in place. The proposed ban, if enacted, would not take effect until January 1, 2025.
If you have a 401(k) plan that allows for after-tax contributions and in-plan Roth conversions (like our Solo 401k plan), you can make your 2023 contributions up until your business tax return deadline, including any timely filed extensions, in 2024.
For those without a current plan, you can set up a Solo 401(k) and make Mega Backdoor Roth contributions for 2023, as long as you do so by your business tax return deadline, including extensions, in 2024. You can then proceed to make your 2024 Mega Backdoor Roth Solo 401(k) contributions during the 2024 calendar year.
To execute the Mega Backdoor Roth strategy, you must first make a voluntary after-tax contribution to your 401(k) and then transfer those funds to your Roth Solo 401(k) or Roth IRA. If the ban is indeed enacted, you’ll need to complete both the contribution and the transfer by December 31, 2024.
Keep Calm and Roth On:
While the Biden Administration may have resurrected proposed Mega Backdoor Roth Ban, it has a long way to go legislatively not to mention the outcome of the election or other unknown variables that could shift the legislative priorities. Moreover, even if the proposal were enacted, there is still time to take advantage of this powerful retirement savings tool as one can still make both 2023 and 2024 Mega Backdoor Roth Solo 401k contributions.
Please continue to stay engaged as as we will continue to monitor and post updates.
