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House Democrats have proposed a rule barring Roth’s transfer to the wealthy as part of a wide range of tax increases on wealthy Americans.
But there is a paradox in the proposal, according to tax experts.
A Roth transfer is a mechanism that allows taxpayers to transfer their traditional (pre-tax) retirement savings to after-tax Roth funds. The person must pay income tax on the amount transferred.
Unlike other aspects of the Democrats’ tax package, most of which will take effect in 2022, the ban on Roth’s transfer of pre-tax money did not start for 10 years. The extended lead time would give more wealthy taxpayers the ability to convert their retirement accounts before they are rejected – which would generate additional tax revenue for Democrats’ policy agenda, experts said.
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But that ruling will also bolster the very transfers they’re trying to reduce, according to Ed Slott, an accountant and retirement expert at Rockville Center, New York.
“[The legislation] “It encourages an acceleration of Roth’s transformations,” Sloot said.[Democrats] need money.
“They still want to pay all transfer tax returns for everything else on the bill.”
Of course, after 10 years, the wealthy will no longer be able to use Roth transfers to get around the current income limits in their Roth individual retirement accounts.
Currently, single individuals cannot contribute to Roth IRAs if they generate at least $140,000 in income in 2021. (There is a $208,000 limit for couples who file a joint tax return.)
But there is no income limit on Roth transfers – allowing the wealthy to have a “back door” Roth IRA.
Roth IRAs are financially attractive because of tax-free investment earnings, no future taxes upon withdrawal, and no minimum required annual distributions.
However, the Democrats’ tax proposal, which was approved by the House Ways and Means Committee last month, would not allow a Roth transfer from a pre-tax or employer-sponsored retirement plan for single taxpayers with annual incomes over $400,000 (and spouses Married people who have more than 450 thousand dollars) after 2031.
“By keeping elevated Roth transfers for high-income taxpayers on the table for another decade, lawmakers can rely on income from those transfers for budget projections,” certified financial planner Jeffrey Levine and Michael Kitsis, chief planning officer and chief planning officer, wrote respectively. St. Louis-based Buckingham Wealth Partners, Inc., strategy analysis of tax proposals.
A spokesman for the House Ways and Means Committee did not respond to a request for comment on the proposal’s timeline.
The Joint Committee on Taxation, which is responsible for congressional taxation, estimates that the appropriation will raise $749 million through 2031. That’s a portion of the $2 trillion or so that will be raised over a decade through other tax provisions targeting the wealthy and corporations, which would fund the measures To expand education, childcare, paid leave and health care, among others.
The Senate has yet to reveal the tax reform package, which may not include a Roth diversion ban.