In the hit 1980s TV series The A Team, B. A. Baracus (played by Mr. T) would often announce that “(the) sucker’s gonna pay.” Well, Congress has found some suckers who are going to pay for the benefits that many will see due to SECURE 2.0 (assuming that it is enacted into law in its current form). In a recent article I outlined many of the beneficial changes that will happen if SECURE 2.0 is enacted and, at the same time wondered how the changes would be paid for.
Congress must have been reading my mind (a scary thought) because the House Ways and Means Committee recently released a draft of proposed changes that will make some folks pay for SECURE 2.0. It does not appear that these new changes will be added to SECURE 2.0 but will march through Congress on their own by means of separate legislation.
Most of the Ways and Means Committee’s proposals are directed at those who are better off financially than your average federal employee or retiree. A couple of the changes only apply to those who have combined IRA and employer plan balances of over $10,000,000 – I bet that not a one of you has anything near that kind of balance. Most of the proposed changes would only affect those whose taxable income was over $400,000 (single and married filing separately) or $450,000 (married filing jointly). Again, most federal employees and retirees will not be affected, but there will be some couples where their joint income exceeds the $450,000.
One proposal has broader reach and will affect those who have been converting after-tax dollars into a Roth IRA using the so-called “back door” conversion. Back door conversions were designed so that those whose income was too great to contribute to a Roth IRA could contribute to a traditional, non-deductible, IRA and then convert it to a Roth. The 2021 income restrictions are listed in the table that follows:
Single filing status
Full contribution allowed if income is below $125,000
Partial contribution allowed if income is between $125,000 and $140,000
No contribution allowed if income is over $140,000
Joint filing status
Full contribution allowed if income is below $198,000
Partial contribution allowed if income is between $198,000 and $208,000
No contribution allowed if income is over $208,000
A not-insubstantial subset of readers have income above these levels and considered the back door Roth as a way to avoid the income limits. (Remember that tax avoidance is legal, it’s tax evasion that’ll get you into trouble). If the Committee’s recommendations take effect, no one at all will be able to convert any after tax money into a Roth IRA, thereby sounding the death knell for the back door Roth.
Back to Mr. T – we now know who are the suckers that are gonna pay. Pity the fool whose income is over $400,000 (single, mfs) or $450,000 (mfj). And pity the fool who has a combined IRA/employer plan balance of over $10,000,000. Then again, aft3er typing the numbers in the preceding two sentences, I realized that someone who is that well off may not be a fool after all. Perhaps that’s just a cost of success.