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Biden’s Build Back Better Could End These Retirement Loopholes


With the passage of the $1.2 trillion bipartisan infrastructure bill, all eyes in Washington have now turned to the $1.85 trillion Build Back Better bill. With both bills combined, Congress would invest more than $3 trillion in infrastructure, education, climate and social programs. The Democrats have scaled-back the Build Back Better bill significantly down from its initial $3.5 trillion and proposed new retirement provisions to help pay for the programs, which could end backdoor Roth and mega Roths for the wealthy. Let’s break down how these rule changes could affect your retirement savings.

If you think you need help navigating the new retirement landscape, or you simply want to start planning for the future, a financial advisor could help you create a plan to reach your goals.

Build Back Better: Closing Backdoor Roth IRAs

One of the major proposals in the bill related to retirement is to end the backdoor Roth IRA strategies favored by very wealthy people as a way to avoid Roth IRA contribution limits. Currently, many will put money in a traditional IRA and transfer it to a Roth account. And the law, at the moment, does not impose a limit on this maneuver. Nor does it prevent a mega backdoor Roth, which is where high-income earners who are typically excluded from a Roth IRA can roll over their 401(k) into a Roth IRA to enjoy the tax benefits without having their income be an obstacle.

Under the proposed legislation, Roth conversions for both IRAs and for employer-sponsored plans would be eliminated for individuals with taxable income greater than $400,000. (The limit would be above $450,000 for married couples filing jointly and more than $425,000 for someone filing as a head of household.)

Build Back Better: New Minimum Drawdowns

BBB retirement

Another proposed retirement change could require withdrawals for very wealthy people. Essentially, anyone with at least $10 million combined in various retirement accounts would have to take out at least 50% of the money in his accounts, which could lead to capital gains taxes owed. If an individual has more than $20 million in a Roth account he’d be required to withdraw all of the money above the $20 million waterline.

There is a catch — if an individual’s income is less than the limits listed above, he wouldn’t be faced with these rules. Since many extremely wealthy people technically earn no income, this loophole could still be exploited.

Bottom Line

The Build Back Better bill will impact many sectors of American life, from childcare to universal pre-K. Though retirement isn’t necessarily one of the focuses on the bill, it will certainly impact how many wealthy Americans use the retirement system — namely by closing the backdoor Roth IRA loophole and requiring minimum withdrawals for mega sized accounts.

Retirement Planning Tips

  • Even if you’ll never have an account worth $10 million, you can still benefit from some help planning for your retirement. ​​Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Make sure you know what your asset allocation within your retirement plan is, and adjust it over time. If you don’t want to have to remember to do that, using a target-date fund is one way to make sure your portfolio adjusts as you age.

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