: A looming crackdown on a popular retirement tax strategy has some investors worried


Roth conversions are one way Americans can save on their tax liabilities in retirement — but the House recently proposed a bill that would curb these conversions for high earners. 

While this may appear to be bad news for some workers, there is a silver lining: More companies are already offering alternatives to these conversions — Roth 401(k) plans — and if the bill is passed, by the time the rule is enacted, there could be even more workers benefiting from this investment vehicle. 

The latest proposal out of the House makes changes to current laws around retirement security. These reforms include preventing individual retirement account holders with more than $10 million in savings to continue contributions, and also to be subjected to required minimum distributions. The bill also prohibits IRA investments from having minimum income or asset levels to participate.

The law, if passed, would also repeal Roth conversions for any single individuals earning more than $400,000 or couples married filing jointly with income more than $450,000. This provision would, if the bill is passed, apply in taxable years after Dec. 31, 2031. Congress has been eyeing changes to Roth IRAs, especially after ProPublica reported PayPal

co-founder Peter Thiel had grown his Roth IRA balance from less than $2,000 in 1999 to $5 billion today.

See: How Peter Thiel turned $2,000 in a Roth IRA into $5,000,000,000

“When you look at this [bill], it is about fixing some perceived abuses in the tax system instead of enhancing the retirement system in any meaningful way,” said Jamie Hopkins, managing partner of wealth solutions at Carson Group. Another bill, known as the Secure Act 2.0, is designed to promote and encourage retirement savings — it is the sequel to the Secure Act, which was passed in December 2019. 

Roth IRAs have income limitations. In 2021, single individuals who earn less than $125,000 can contribute the maximum amount ($6,000, or $7,000 if 50 or older) to a Roth IRA, and what they’re allowed to contribute is phased out until their earnings reach $140,000. For taxpayers who are married filing jointly, the threshold is between $198,000 and $208,000 in 2021. 

Conversions are one way for Americans to work around those restrictions. With Roth conversions, Americans can move a portion of their traditional IRA balances, which are funded with pretax dollars, into a Roth IRA, and pay the tax on that distribution at the moment. This is a popular strategy for people who anticipate they’ll be in a higher tax bracket later in life, or for some, as a way to shield their assets from potential tax law changes under President Biden or future administrations. 

Enter Roth 401(k) plans. Roth 401(k) plans are the after-tax equivalent to a traditional 401(k) plan, in the sense that the contribution limits are higher than IRAs and they’re offered through employers. Withdrawals, like with Roth IRAs, are tax-free (if used correctly). More companies are offering Roth 401(k) options to their employees than they were a decade ago, and potentially even more employers will do so between now and when the rules would change under the House’s proposal, Hopkins said. 

Also see: How to invest in a Roth IRA like — and unlike — PayPal co-founder Peter Thiel

“Most large employers have access to 401(k) and Roth 401(k) plans, and that just wasn’t the case 10 to 15 years ago, so they had to do rollovers and strategic Roth conversions,” Hopkins said. About three-quarters of 401(k) plans today have an option for Roth contributions, compared with less than half 10 years ago, according to the Plan Sponsor Council of America. “I don’t see any reason for that trend to stop,” Hopkins said. 

The proposal will affect high earners more so than the average American (the median household income in 2021 was $67,521, according to the U.S. Census Bureau), and has the ability to “significantly impact” long-term wealth building because of the Roth IRA’s benefits of tax-free growth, said Jody King, director of financial planning at Fiduciary Trust. 

Roth 401(k) plans are a good way to also compound tax-free growth, but not as many people take advantage of these vehicles, King said. “They don’t want to pay the taxes upfront,” she said. “If they can’t do a conversion later, do the Roth 401(k) now.” 

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