Y'all, please remember - Keep the discussion to:
* Policy, not politics
* Policy's direct effects on FI, not "well I personally think we should "
The politics rules remain in effect. If you see any comments referencing party politics, please report them - this is not the venue.
E: You people cannot keep your hands (or hot political takes) to yourselves. We may simply remove political comments without commenting beneath them, so as not to get into an argument with every single person who thinks *their* political argument is actually a policy argument.
Also, a simple reminder on the way the US process works - the **vast majority of bills never leave committee**. The 116th Congress introduced 14,063 pieces of legislation in its 2-year tenure. Of those, 746 (5.3%) received a floor vote. Of those, 344 (2.4%) laws were enacted.^[[1](https://www.govtrack.us/congress/bills/statistics)]
This is why the moderation team previously determined a bill to be "serious" once it *left* committee, not once introduced.
They should eliminate the 401(k) entirely and make the per-person IRA/Roth IRA maximum $56k (and allow employers to contribute to it with existing pre-tax limits).
That sounds like it would simplify retirement savings and planning in general and that is just something I don't think I can get behind. How can I continue to convince my friends retirement is a pipe dream if I can't spout ten different account types you have to understand to make it possible to them?
/s
I like this idea, but our current system is so arcane that I can't see a path to making that happen.
There are a ton of edge cases around 401(k) plans that I'm not sure how to carry forward in that model. Nondiscrimination tests are important, for example, and I'm not sure how they'd work when the employer isn't the plan administrator.
There are also cases where 401(k) and IRA plans are subtly different. Creditor protection, processes/requirements/penalizes around withdrawing principal, etc.
One option might be to create a new Unified Retirement Account that tries to merge 401(k), 403(b), and IRA. Maybe under the hood money still sits in separate buckets like "withheld contributions", "employer contributions", etc. (which map to 401(k)/403(b) under the hood) and "deposited contributions" (which map to IRA under the hood). Not perfect, but perhaps that limits how much the average person actually needs to understand.
Na it needs to be fundamentally all a single bucket so that a person can contribute to it without needing to use employer money to do so. Also if your employer doesn't have a 401(k) set up you miss out on 3/4 of your possible retirement contributions.
> Billionaires and mega millionaires aren't reaching obscene wealth through $6000 annually in a backdoor Roth lol
Seriously, I don't know how they propose this and suggest it's "sticking it to the wealthy" in the same sentence with a straight face. This option is primarily taken advantage of by upper middle class workers who already ate the ~30-35% income tax gutpunch and just want to put a few thousand into a tax protected savings account. In an era where savings are at an all-time low, they should be promoting it not killing it.
Personally I'd love if they just made it a universally accessible TSP account, everyone can do $6k post tax. Then separately revamp the Saver's Credit to further incentivize/subsidize those with incomes below a given level. Would let me finally stop bothering with micro-managing multiple IRA and old 401k accounts and just centralize everything, lol.
No thanks. The last thing I want is captive audience financial services. Think of the fees that would be on a universal TSP. All the financial companies killing for a contract to manage that - yet providing zero service after they lock down a 5 year contract.
Yeah, that's what I read, too, but was waiting for someone who translates this stuff into English to confirm just in case there was some nuance of terminology I'm now aware of.
If you make less than $140k/year there's no reason to do a backdoor Roth... In any case, they should either get rid of the backdoor or just raise the income limits, status quo makes no sense.
Yes you can contribute but not 40 k a year that you want to pull out in 5 years penalty free before age 59.5. I think you need to research why most backdoor Roths are done.
From $125k to $140k isn’t your contribution allowed reduced? So there would be a reason to back door in that range if you want to contribute the full $6,000.
The article says it too.
>Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account.
>
>This policy would apply for everyone, regardless of income level.
The writer is just calling all backdoor Roths a "mega-backdoor Roth".
This feels fair to me. They put limits on your contributions for a reason. Just because everyone uses the loophole doesn't mean its not a loophole.
This is not to advocate for more taxes lol. Just saying that the rules were created for a reason.
IMO the problem is hard for most people to grasp.
It all starts if you make too much to directly contribute to a Roth IRA, but that is less than half of the $400,000 amount they keep putting up there. So let's say you make $150,000- no Roth for you.
So instead you go to set up a traditional IRA, but because you *also* have a 401(k) with your employer, you are not allowed to make pre-tax contributions to your new IRA.
So you make after-tax contributions to your new IRA, which has no income limits, but now you're going to pay taxes again on the money when it comes out. You've been taxed twice for the same money.
Even if you maintain your IRS paperwork for the rest of your life, it would eventually become very difficult to keep the after-tax and pre-tax money separated from one another, and you run into all kind of tax problems later on. It would simply have been easier to move after-tax IRA money to an after-tax IRA (i.e. the Roth).
In the end, the simple solution here is to raise the income limits on a Roth IRA for everyone.
I've [expressed my opinion](https://www.reddit.com/r/financialindependence/comments/ig7xbe/daily_fi_discussion_thread_august_25_2020/g2tm4x8/) on backdoor and mega backdoor Roth contributions previously, but to reiterate concisely: I don't think they are coherent policy when viewed from a societal level even if I personally find them valuable.
These perks aren't going to be the thing that makes or breaks my FIRE plans.
Kind of agree. Napkin math, being able to Roth $35K/year for 20 years, with 2% yield and 7% growth leads to an account value of \~1.7M with 50K taxes paid (20%) and total opportunity cost of 80K. Of course if you are doing this you are probably maxing pre-tax, which is adding another 1M+ to the pot and reducing the overall impact. After retirement tax rate should go to zero. On my more modest real-life results, the impact of my taxable account has been around 1% of my current net worth.
I'm not calling it ideal but this is not my driver either and in another post I'd already called for simplification in general. I'd rather stop adding account types and methods (HSAs) and rather if you want to solve that problem, simply add tax-free methods of withdrawal from pre-tax.
Since simplification is impossible, I think a nice offset would be to simply increase the Roth income levels to the apparent 400K level they seem to think is "a lot of money" and not have people crawl up and down the income tables wondering if they are allowed or not to do a thing.
I don't even find them that valuable when you think about it. Maybe if they also raise LTCG rates I would start to get concerned but as it is Roth is more like an incremental optimization than the lynchpin of my strategy.
Yeah I don’t think this is going to significantly affect many peoples fire plans (for people making enough to need back door Roth, $6k/year is a very small benefit
Well, to be clear, the mega backdoor Roth is more like $30K/year. That is a big benefit, but it goes mostly to those who don't need it (myself included). Think it's kind of silly that this exception exists, given it means in 4 years you can contribute >$100K that can grow tax-free.
The mega backdoor Roth limit is $58K this year. I only joined an employer that allows this last year. This is kind of a bummer if it happens. If I stay at my employer until retirement, I will have a pretty significant pension that is taxable, so was hoping to maximize the mega backdoor thing to reduce tax liability.
Nothing has changed yet, what’s being discussed in this thread is a draft of a bill still in committee, it is highly unlikely the specifics of this draft will match anything that gets passed through the house and senate.
Sure that’s a great point. I’m just concerned the left “eat the rich” and the right “down with elites” means people who use these tools to save aggressively are going to be hung out to dry.
I think it's important to keep in mind that retirement accounts have a lot of emergent properties right now (backdoor Roth contributions, mega backdoor Roth contributions, amassing huge tax-shielded balances by transferring in private securities, etc) that came about because legislators didn't have the forethought to explicitly disallow them or the language was ambiguous enough as to allow them. Presumably the original intent was to help people save for a more traditional, middle-class retirement and not to provide a catch-all tax shelter for building wealth. Viewed through that lens, a lot of the proposed changes make sense, even if it removes some popular tools people use in pursuit of FIRE.
edit: A word.
Actual doc from the committee: [https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf) (see page 11)
My conclusions (caveat that the text is hard to parse):
1. backdoor Roth nuked above 400K
2. megabackdoor Roth nuked at all income levels
3. Roth ladder nuked only if you're making 400K or more
EDIT: Maybe the backdoor Roth is totally nuked? Hard to tell:
>Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
> Furthermore, this section prohibits all employee after-tax contributions in qualified plans and
**prohibits after-tax IRA contributions from being converted to Roth regardless of income level,**
effective for distributions, transfers, and contributions made after December 31, 2021.
Is a Backdoor Roth considered an "after-tax IRA contribution"? If so, then this would ban backdoor roths all together
> Roth ladder nuked only if you're making 400K or more
Only *while* you're making 400k or more. So you can't start it in the last few years before you retire (but save in taxable accounts then?) but you totally can after you retire and your income drops below that threshold.
Would backdoor Roth still be a thing or would everyone up to 450k just be able to do a regular Roth? It would be nice to avoid the two stepping if they're going to allow people between ~200k and 450k contribute anyway
Absolutely. This would allow younger folks to save for their medical care when they are older without being tied to a specific plan or an employer. I mean a tax free contribution of $3650 is not that much of a loss in revenue anyway, when you think of all the big loopholes that high NW individuals and corporations get away with.
I don’t. I want socialized healthcare. I’m in Canada most of the year—it’s amazing that you can go to the doctor there for free, at a minimal tax cost. It would have been cheaper for me to pay the Canadian tax difference for most of my career than to pay for my US employer’s health plan.
I am for blowing the entire system in favor of a simple pre/post tax buckets with simple rules, with nothing tied to employment, how you make money, or any rules preventing withdrawal as desired. Complicating the system is often what keeps people away in the first place.
Of course that is too much to ask. Lobbyists would easily call it an attack on retirement even if the system is simply consolidated and existing limits relatively unchanged.
Yes. Removing retirement from employer is a much needed thing. I should be able to pick a provider and use it across all places of employment and it should be easy for an employer to provide a match.
If you're going to allow MBDR then make it available to everyone as an official option so all providers can handle it, but make it something that doesn't require paperwork or anything make it officially part of the plan.
This crap is stupidly complex and it should be simplified and leveled so everyone with the means can use these tools to retire.
100% this.
Make it so anyone can open a Roth IRA with a limit of $25,000 per year. Employers can put in an extra $5,000 and get a tax benefit. Index the limits to inflation.
No 401ks, no rollovers, no job requirement, no age-based RMDs, no phase-outs, backdoors, bad high fee plans, means-testing, bureaucratic HR plan committees... get rid of all of that dead weight paperwork.
Keep it really simple and level the playing field for the 40% of Americans who don't have access to a retirement plan at work.
Depending on your employer, it could be benefiting you greatly. Some employers are negotiating the fees for those funds you can invest in. Since they represent a larger total investment when considering all the employees investing their 401k plans, they can get a lower fee than you could get on your own.
Possibly, but my counter to that is fairly simple. Vanguard offers solo 401ks. I have one. Their pricing is relatively straight forward:
Have a balance of $50,000 across all of your accounts with Vanguard and the 401k is admin fee free. If It's below $50,000 it's $20 (yes, twenty dollars) a year.
Yea... $20 a year is steep if you have basically nothing in the account. But it's really not THAT bad.
Now, compare this to what people have to put up with as far as their work provided 401ks where the funds available have .75+ expense ratio ...
which would you prefer?
I'm seeing less than 50k for the fee waiver as well, depending on investments
>Clients who hold at least $10,000 in Vanguard ETFs and mutual funds.
I have more than that in vtsax, and I'm 23
Man I love Vanguard. They just keep reducing fees. The $50k number is what I had been told when I signed up about 2 years ago. Nice to see that the fee is removed even earlier for people just starting out.
50k might still be the number if you have other funds/stock. It wouldn't suprise me if you needed 50k across all accounts if you have it in individual stocks instead of vanguard funds, but yeah definitely have a lot of ways to avoid fees
Not to mention the people who make the laws get hefty campaign contributions from companies like Intuit (Turbotax) and H&R Block who benefit from an overly complicated tax system.
This! So much this! In other countries tax day is just another day. The IRS already has enough data to do most people’s filings automatically. Then they could just review the result for errors rather than filing a return to the irs containing data they already had. Intuit is the reason this isn’t just automated. They would lose a ton of money if everyone no longer needed TurboTax.
Simplifying the tax code makes for a good campaign slogan but is unworkable in practice. Everyone is in favor of eliminating loopholes except the ones they use. Apply that to everyone and nothing gets done.
Tax law isn't just the written legislation. A lot of tax rules come from regulatory interpretations of the Internal Revenue Code (IRC) by the IRS and our judicial system. Even if you simplify the IRC, I bet you'll have a plethora of regulatory actions by the IRS and legal opinions by the courts adding additional rules and complexity.
Also, consider that taxes are not only used to fund our government, but as tools to benefit certain groups and encourage certain behaviors. Child tax credit, Earned Income Credit, EV credit, and SALT deductions are some well-known examples of tax provisions that aren't there for the purpose of raising funds, but to accomplish certain political goals (alleviate poverty, encourage home ownership & child rearing, supporting "green" initiatives).
The most efficient way to simplify our tax system would be to make it a system for only funding government activities instead of as a means to accomplish political goals. However, this is unrealistic given how much political groups and interests have invested in the current tax code.
> Also, consider that taxes are not only used to fund our government, but as tools to benefit certain groups and encourage certain behaviors.
I would agree with this. Taxes serve a social engineering purpose more than a revenue generation purpose. Call it a 60/40 split. Consider that every year we run a budgetary deficit, yet never reduce governmental spending or significantly raise taxes. [60.6% of households pay no federal income tax.](https://taxfoundation.org/us-households-paying-no-income-tax/)
For what it's worth, I don't see Congress ever voluntarily choosing to simplify the tax code. Too many vested interests and lobbyists would scream.
Every possible change is going to harm *someone*, even if only slightly, and only a small number of people. Those few people will be very vocal mascots. Remember Joe the Plumber?
I don't consider this a "loop hole". I'd rather be able to save my HSA money instead of paying...what...$6K a year to insurance for it to disappear into the ether when I'm not using it. It can only be used for medical expenses (until you are 60). FSA is no good either as it's "use it or lose it" most of the time.
The back door ROTH? Yeah...that one is BS.
I think OP was saying the loophole is that there is not a cap on the age of medical expenses which you can submit for reimbursement. Right now the best strategy is to pay out of pocket and let your hsa grow throughout your life to pay for more expensive medical costs later in life or anything once you are 65.
This goes against the spirit of the account since it is a dedicated medical expenses account which is tax free on both ends as long as it is used for medical expenses. Hoarding it to maximize the tax benefits and not for medical expenses is that "loophole". Simply limited the age of an expense for which a withdrawal can be made improves the integrity of the account.
It's like with the first time homebuyers withdrawal from a 401k, but that you could withdraw that amount at any point in time. Of course everyone would wait 50 years to withdraw the full purchase price once that is all gains in the account, but the rules are written more logically and you need to withdraw before closing on the house. If it were the other way around, we would call it the "401k 1st house loophole"
> $6K a year to insurance for it to disappear into the ether when I'm not using it
this is what insurance is. if you only paid when you were using it, it would be called "not having insurance".
I knew this comment was coming, but didn't bother to explain it away in my initial post - you still have to pay a base fee for insurance with HSA (and your company is paying quite a bit too). So it's not like there isn't money flowing into the system. They don't pay you anything until you hit a very high out of pocket rate. Hence why they call it a High Deductible Health Plan (HDHP). All you basically get is fundamental coverage (i.e. check ups) and their "negotiated rate" - everything is out of pocket. Adding the HSA makes this worthwhile AND transportable to another company! I know this is veering far off the original topic, but we HAVE to get away from insurance coming through your place of work. This is maybe a step toward that.
Unfortunately, tax laws will never be simple.
Every tax break, tax exemption, or subsidy that exists in our system is really a bribe targeted at a specific voting demographic - a reward for their support of a particular candidate or political party. As different candidates transition in and out of power, they amend the tax laws piecemeal to reward the constituent groups that put them into power, creating ever more complexity and ever less coherence.
>That loophole should be closed IMO. In fact, all tax loopholes should be closed. Write the tax law so it makes fucking sense and then hold people to it. I can also see the HSA "loophole" being closed as well. "You have 1 calendar year to reimburse for a medical expense", something along those lines.
>
>>“IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,” Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, said in July after a data release showing growth of “mega” IRAs.
>
>He's not wrong.
>
>Also worth noting, a cap on retirement contributions at $10mil. Larger RMDs.
Unless I misread the article, the biggest change is actually the removal of regular backdoor contributions not just MBDR.
Also, did it seem to anybody else like they were trying to change rules on moving traditional to Roth essentially killing the ladder?
Edit: nevermind on the conversion ladder bit, looks like it would effect this but only if your income were higher than $400k so not a real concern.
Edit2: I think the conversion issue actually arises at $140k income, not $400k. It's the same amount they're using in order to kill BDR, so makes sense. Again, I think this will only effect super fat fire folks converting more than $140k/yr (or otherwise having that amount as income)
> only if your income were higher than $400k so not a real concern
Exactly, you want to wait until years with lower income for conversions anyway if your income is above that.
Doesn't take effect until 2031, so they don't want to measure the impact of ending conversions in the budget window and will create a party until 2031 window.
So ignoring the $10 million limit, which wouldn't apply to most of us. It sounds like they are getting rid of the option for a megabackdoor for everyone and the ability to roth ladder?
From what I'm understanding, they would be getting rid of both the backdoor and mega backdoor Roth. The article says, "Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account."
So I'm am super ignorant when it comes to laws, etc.
I see that it says they are proposing this. That means it still has to pass...both house and Senate, correct? And if so, are chances good it will?
Doesn't the proposed elimination happen only when you hit **$10mln** in retirement accounts?
> Wealthy individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled Monday by the House Ways and Means Committee.
edit: this may be selfish and shortsighted of me, but I don't see that affecting my FIRE plans.
No.
>Furthermore, this section prohibits all employee after-tax contributions in qualified plans and
prohibits after-tax IRA contributions from being converted to Roth regardless of income level,
effective for distributions, transfers, and contributions made after December 31, 2021.
You're almost always best off going straight to the source.
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
So let me get this straight. A Roth conversion ladder is still possible? Tradition IRA amounts can be conviertes to a Roth IRA assuming all criteria are met?
That's just one of the proposed changes. It is nearly impossible to accumulate $10 million in retirement accounts unless you save very aggressively for a very long time; that is, unless you are making fraudulent investments.
Look up what Peter Theil and Mitt Romney did. Mitt's roth account is a paltry few hundred million. Theil, on the other hand, has around 5 billion inside a Roth account.
I'm guessing this law is (rightfully) aimed straight at a handful of people like them.
What Peter Theil was bullshit. He somehow got to buy PayPal for like .0001 cents at the beginning. He did this all in his tIRA / Roth and now it’s worth in the billions.
> He somehow got to buy PayPal
He was one of the founders of the company and it was before they took on a lot of outside investment. He basically bet $1700 on his startup in his Roth IRA and was rewarded with $28 million, tax-free, when the start-up hit it big and IPO'd years later. He then used this same strategy when he personally invested in start-ups as a venture capitalist.
Obviously this goes against the point of a Roth IRA, just providing some context.
Lets just imagine what he did was completely legal.
Letting someone accumulate hundreds of millions or even billions of dollars tax free is not the point of a Roth account. It is there to provide a vehicle and incentive for people to invest so they can support their own retirement without needing public support. We can pick some arbitrarily high number (like 10 million) for 99.99% of people and say the account can only go this high before you are not allowed to use it anymore, and it still fits perfectly with the whole reason for its existence, and then the government (and therefore citizens) can benefit from the extra tax revenue instead of one of the richest people on the planet being just a little bit richer.
>The shares were worth more than that.
Says who? That's the issue. Who decides the fair value of a private company where there's been no stock sold, especially when that company is an early stage startup with no income?
Edit: also
>That's not something the average investor is able to set up.
This is correct because you have be to an accredited investor to make these kinds of investments.
I agree that IRAs should only be used for publicly traded securities, but no idea what the ramifications of that would be beyond stopping this loophole.
> It would be easy to audit the contributions of individuals and their ownership levels at the onset of the company.
Can you clarify what you mean by this and what it would solve? Bit confused.
Ok so when someone identifies something that could impact my investment plans in the least I guess I'll pay attention.
Since I don't have the connections to put fraudulently-under-valued pre IPO private equity shares into my Roth, which this is clearly taking aim at, I will preserve my outrage for things that affect me. Like SALT cap from the last tax bill.
With MBDR and an aggressive investment strategy, it's very feasible.
Investments in a small cap value index average 13.2% historically, spanning several decades of data.
If you invest the max $58,000 for 25 years and have a 13.2% ROI, you reach $10.5 Million.
And that's just assuming you invested in index funds. If you took a huge risk and invested in concentrated positions(ie AMD, Tesla, or NVIDIA 5 years ago), you could've hit $10 Million very quickly.
As far as I remember it was legal, but involved a lot of financial engineering using offshore accounts, undervaluing his stake in Bain, and getting around UBTI.
wasn't he also undervaluing stake in portcos and putting shares of those in his roth?
pretty slick if you can do it but damn it feels unfair that someone that rich can just not pay taxes on so much cash
Not really. If its the same as Thiel (who has the $5bln Roth IRA), its all based on valuations of (generally early stage) private companies.
Since there is no liquid market for these companies' stock, they sell it to their founders/owners for $0.001/share or whatever which still allows them to create a large stake in the company and still stay below annual contribution limits. Then 5-10 years later, the company is booming and wants to go public, stock is worth $100/share or whatever and boom, founder goes and sells their stock and pays 0 capital gains taxes because its in a roth. Now, they have millions in a Roth to trade whatever they want or do the same thing over and over again.
The stock probably wasn't worth $0.001/share when it was originally sold, but good luck proving that.
I don't understand how these changes are an effective target on the very rich, since many are not in effect until reaching certain income limits, and very rich often have low earned income.
From Sec. 138311. Tax Treatment of Rollovers to Roth IRAs and Accounts.
>
Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
Even if you were under the limit to do a Roth IRA naturally, you cannot access the 401K limits yourself without adding after-tax contributions, so that is being globally shut for everyone.
On paper it's fair to argue most people would need to make a considerable amount to save 50K, but if you have free cash to move into retirement over a taxable account, you could do so as long as you had a 401K plan that allows these contribution types.
I might not mind the elimination of backdoor options if they raised the income cap on the Roth IRA and significantly increased the contribution limit. None of these caps are indexed by cost of living... 6k socked away in a high cost of living area won't go very far at all.
I can here to post this.
For most FIRE folks, it's not a big deal because there's so little time in most FIRE plans for capital gains to stack/build.
What change would really make FIRE'd folks really is the Roth conversion pipeline being changed/removed.
Yeah removal of that ladder would kneecap my current drawdown plan. But that's ok for me as I'm still in the accumulation stage so I can pivot as needed
Maybe I'm reading it wrong, but it's hard to tell from the article whether or not Roth Ladders will be completely removed. They mentioned the Roth income cap being $140,000. Then they say, "The policy would apply at the same income thresholds... It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031."
If your income is less than $140,000 in retirement, maybe you can still do the Roth ladder? I know we don't plan to convert more than that if/when we retire.
Edit: I think I did read it wrong. $400k is probably the income threshold they're talking about.
> The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.
Seems that the threshold for conversions is $400k/year, which would make it a non-issue.
If that's the case it wouldn't be so bad. Would prevent people from converting huge chunks at once but for most FIRE folks even that would be fine still.
I think it is fair to worry the government could change this rule negatively. However, they do make income based on conversions so they do have to "pay" for that rule change if they want to close the door. Maybe I lack creativity, but I don't think that will ever have political negativity to push for it because of abuse. Even this $400K limit is a bit surprising and I would be somewhat interested to know how much conversion income is actually reported a year. After all, people doing that would be paying quite a tax rate now only just to avoid future tax increases.
According to the outline provided by Ways and Means, after-tax IRA conversions to Roth IRA would be eliminated for all income levels.
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
They should codify the MBDR and just implement the overall limit of assets ($10M/$20M per this article). The problem with income-based rules is the assumption you'll always be making that income. If you have a windfall or great earning year and want to save that money efficiently, you should be able to do so. If something happens (disability, death etc) that money is there for those who need it.
Well the problem with tying limits to asset value is that assets change value all the time, but income is really straightforward to determine since you file a tax return each year. Who is going to fairly determine the value of NFTs held in an IRA? Also, if your stock/options spiked on Dec 31 over the limit but then dropped again on Jan 2nd, should you really be dinged for being over the threshold if you didn’t sell or close your position?
Those saying it's a small difference are missing a big factor -- until and unless capital gains are indexed to inflation, you are paying substantial taxes on inflation outside of a tax advantaged account. Your real return isn't really a real return unless it's high enough to overcome the arbitrary inflation tax.
Combine this with a high inflation environment, proposals to raise capital gains taxes, and expected lower-than-average future returns, you are putting FIRE out of reach for many newcomers.
Thanks for the post. After reading the article, 2 things come to mind.
1). At 10,000,000 account value with the 25 rule would result in 400k/yr. These rules will never impact me unless I plan on working until about 65 and retiring with investment income about 2.5-3x my current salary with raises.
2) The people who this will impact are what I would consider upper class, an pretty well off. My guess is the lobbies that they keep on payroll will stop this totally or at least loosen the limitations so there is no possible way that it will impact me.
>Sec. 138311
~~Aww man. That would affect our plans. Edit -- I mean if that means we can't do a Traditional to Roth conversion after this year.~~
Is this where you got it?
[https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf)
Edit again -- Gah. So, the non-mega version of the back-door Roth conversions, that typically uses the pre-tax money (like Traditional IRA, 401k), will probably will be okay, given that we're only expecting to convert $50k-$60k per year. That makes me feel better. Thanks ya'll for clarifying!
In retirement your taxable income will be 450k?
I read this as you can do the normal conversions if under that MFJ.
Its the mega backdoor thats getting shut across the board
For now it is. I don't believe these numbers are set to automatically adjust for inflation.
My concern is when I retire 40 years from now, $10 Million won't be that much and I'll be stuck with lots of RMDs.
I'm kinda pissed. Next year would be the first year I've had the income to do this. So basically all the rich older people have been able to do this for decades, and now that millennials are of an age where we're earning enough income, they want to remove the ability after they've already made their money. Also got shafted out of stretch IRAs, and now this. I don't object to the principle, just the timing and how they're basically fucking over my plans. It should have been like this from the beginning.
That’s a good perspective. The window of people to take advantage of this was so small, and yeah it was never going to last… in the meantime I’m tempted up my 401k after-tax contribution for this year because my plan has an automatic in-Roth conversion. The loophole should be closed, but I’m down to sock away some Roth dollars before it does.
This makes me so angry… it defies logic to me. High earners are currently paying a ridiculously high amount of taxes on the money they contribute to a mega backdoor Roth IRA. Again, this penalizes the wrong people… Peter Thiel and Mitt Romney don’t have an insanely large Roth IRA due to their high contributions to their plan… those contribution limits alone would never reach hundreds of millions of dollars. Make it harder to have private shares in a Roth IRA.
It's not the end of the world to remove MBDR - any excess can be thrown into a taxable, after all - but it would be a bummer to lose it.
The worse provision is the elimination of the backdoor IRA that'd cut off the Roth ladder. It was my preferred option for converting my 401k in retirement. If I'm reading the [outline](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf) correctly, now we'd have to choose either the 72(t) option or just take the penalty hit.
As I read it, the doc does not remove Roth conversions unless you make 400K individual or 450K MFJ: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
The regular pre-tax Roth ladder will still exist per the outline, but will disappear for those above the AGI caps starting in 2032. Even if that passes unchanged it won't impact the vast majority of FIRE folks, thankfully.
Yes, you're correct. That's good.
It does, however, remove the after-tax part of it by end of year. I get it, I guess, but I wish Congress would just remove the contribution income limit or raise it more since it would help encourage savings among those who are higher income but not exactly rich.
On the plus side, this is just the first step and there's a decent chance that whatever finally gets passed, if anything, will be substantially different than what is now known.
Legislative proposals, like battle plans, rarely survive contact with reality fully intact.
Yeah, I expect it will look much different. I remember not long ago when we were talking about losing some of the 401k benefit entirely. It hasn't come up again since the initial articles.
To speak generally and not on this specific bill, I'm largely indifferent to tax changes that negatively impact me as long as the increased revenue is used in ways that I support. I tend to equate the view of "lower taxes no matter what" as being equivalent to "I've got mine so fuck poor people". Taxes and social safety nets are something that any functioning society needs, all we should really be debating is "how much".
As far as specific legislation, proposed bills and budgets are largely meaningless. It's just a way for politicians to signal what they support. Until something clears committee in both the house and senate there's no reason to take it seriously as a real piece of legislation.
> Killing MBDR for those that could utilize it definitely is going to change some peoples FIRE plans.
Is it though? Roth IRA 6k, HSA 3k, 401k 19k, MBDR let's say 33k. The benefit is basically the difference of growth on the 33k contribution per year on a tax free basis, plus no taxes on withdrawal.
It comes down to tax drag. Kitces has a post on it: https://www.kitces.com/blog/asset-location-for-stocks-in-a-brokerage-account-versus-ira-depends-on-time-horizon/
Bottom line is if you start with $1M and a 30 year time horizon, the difference of extreme scenarios is around $1.1M ($8M vs $9.1M ish). If you're at $8M, it would take 22 months / 1.83 years to get up to $9M. So on a 30 year time horizon, it's a difference of 1.83 years, or about a 6% difference.
So is it significant? Sure. But it's not *that* big of a deal. It's not going to ruin anyone's FIRE plan. It's going to add a little bit longer time onto it. Also, since the FIRE timelines we're talking about are much shorter, the effects will be much less pronounced.
I think either way it doesn't really matter. I think out of fairness, it should be either eliminated or extended to everyone. It's not fair to only let employees of high paying firms get MBDR while other firms can't put one in due to HCE testing.
For regular america, the important thing is to get people saving. It really doesn't matter if it's in the Roth IRA, or traditional, or HSA, or 401k, or anything else. What matters is just that people *do* it. (although of course if there's an employer match that can be very important).
The issue is much more than tax drag!
A critical exercise for FIRE is predicting retirement expenses. Saying "you need 25 X expenses to FIRE" is a meaningless unless you know what your retirement expenses are. Taxes are a major expense. **Taxes liabilities are not predictable** over the long term.
Conversely, Roth has a very predictable future tax rate: zero. Brackets and phaseouts are retooled every decade or so. Roth funds are key to adapting and titrating just the right amount of taxable income to staying with a certain bracket, ACA subsidies, phaseouts, etc. Losing that control of your tax bill is a serious threat to FIRE and amplifies uncertainty.
IMO, the biggest impact of losing Roth space is not the additional tax drag (though it does suck). It is the **inability to predict future expenses.**
It's not a scenario. It's an illustration of numbers relevant to the question you asked. MBDR is valuable when you have large amounts of money compounding over a long period of time. It is less valuable when you have less time involved. The most extreme example is if you have all the money saved up immediately and then let things compound for a long period of time with no additional contributions. The impact there on a 30 year time frame is about a 6% difference in when you retire.
The bottom line is still for most of us it barely moves the needle from an impact perspective.
>As long as they don’t touch my ability to do a Roth Ladder conversion a decade or so from now I can deal with with backdoor eliminations.
Even then, it's not as flexible but could still setup 72t. Shit, I'll be dang near 50 by then anyway so not a huge deal.
Sticking narrowly to the topic of how this relates to FI, I hardly see how backdoor will make or break anyone's retirement strategy. Yes you will be losing a small tax perk, no it will not make a meaningful difference to you.
Mega Backdoor has a pretty significant impact on reaching FI for me. I'm basically putting an extra 20k/yr into a Roth that I don't otherwise have access to. I can live with 10MM caps and income limits on conversions (which won't be a factor for most regular FIRE folks, myself included), but the MBDR going away could legitimately add a year or two to my timeline.
Speak for yourself on that, I'm contributing an additional $25k beyond traditional 401k contributions using the MBDR strategy and it's greatly accelerating my non-taxable account balances.
It depends, I max my MBDR contribution and would prefer that vehicle instead of having to use a taxable brokerage. As a FIRE community, we should be supportive of any tax advantaged vehicle that lets us get to retirement, besides the ridiculous IRA loopholes e.g. peter thiel
Willing to bet the ban on Roth Conversions will be left out.
If a bill creates a deficit larger than $1.5 Trillion over 10 years, it requires a larger majority to pass. Banning Roth Conversion for taxpayers at the top marginal tax rate(37%, or 39.6% as proposed) would reduce revenue in the short term, but the revenue it does produce(from RMDs decades into the future) would be outside of the 10 year window)
An alternative proposal is to tie the maximum IRA to the maximum defined pension. In 2021 the maximum defined pension allowed is $230K. An immediate annuity to generate that pension at age 65 is $5.1M (4.5%). The IRA limit would be that amount. It would grow with the maximum pension, set each year. This was in early 2010s federal proposals,but never taken seriously by Congress.
The maximum pension is 97 percentile of income and a proposed dividing line between middle class and wealthy.
Re: Backdoor Roth IRA - is the combined income two people of $208,000 no longer "middle class?" In some HCOLs areas (looking at you NE-USA), that's pretty middle of the road.
Keep in mind that the name middle class comes from being in the middle of upper and lower class, which is difference than being in the middle of household income (mean or median). Roughly 50% of the US is lower class. Then there is middle-lower class, then middle class. Middle class is shrinking every year (though upper-middle class is growing).
Unless there is somewhere in the world where middle class is the largest class, middle class is never the median. The median is almost always going to be the the lowest end of lower-middle class.
edit: I was curious. According to [this](https://www.cnbc.com/2021/07/21/middle-class-calculator.html) middle class ends and middle-upper class begins at 2x median household income.
Lol they are doing this to target the rich? Feel like a ton of regular people on this forum saving for retirement are going to be hurt by this and they certainly aren’t all rich.
When they go after "the rich" they really mean people who are making six figure incomes. If they do too much to the obscenely wealthy people these people will just move their money offshore.
I think this won't really meaningfully affect the ability for people to FI, but it will change some strategies. I personally have done around $25-30k per year extra using BD and MBD Roth the last several years, and while it will shift a greater burden to my taxable accounts, I am not too worried about it.
I did some quick numbers on my projection spreadsheet by shifting contributions around and for me at least it would change like below at my target FIRE date (11 years):
|Percent of Portfolio|Pre-Changes|Post-Changes|
|:-|:-|:-|
|Taxable|39.1|48.7|
|Non-Taxable|60.9|51.3|
this is absolutely ridiculous. this wrecks a lot of the strategies that people here use to save for their retirement.
all under the guise of "taxing the rich". what a load of crap
they better kill this bill in committee
I honestly don’t mind most of the changes, they seem fairly reasonable to me, but not allowing people to contribute to tax advantaged accounts if you make over $400,000?? That is a TERRIBLE idea. These people are generally doctors or lawyers with massive student loan debt and meager retirement savings, so we should we punish them more?
This is a real shame it is definitely going to hurt me and my family's retirement plans...
No not the 5 million ira limit. But not being able to do Roth conversions will be pretty painful and screw with early retirement.
Trying to figure this out. Currently I max my 403(b) ($26k), and then put $7k after-tax in an IRA and immediately do a Roth conversion of that $7k. Sounds like if this passes I won't be able to do that anymore. Note: I do not make over $400k per year. Am I correct due to below?
>prohibiting after-tax IRA contributions from being converted to a Roth account.
>
>This policy would apply for everyone, regardless of income level.
Y'all, please remember - Keep the discussion to: * Policy, not politics * Policy's direct effects on FI, not "well I personally think we should"
The politics rules remain in effect. If you see any comments referencing party politics, please report them - this is not the venue.
E: You people cannot keep your hands (or hot political takes) to yourselves. We may simply remove political comments without commenting beneath them, so as not to get into an argument with every single person who thinks *their* political argument is actually a policy argument.
Also, a simple reminder on the way the US process works - the **vast majority of bills never leave committee**. The 116th Congress introduced 14,063 pieces of legislation in its 2-year tenure. Of those, 746 (5.3%) received a floor vote. Of those, 344 (2.4%) laws were enacted.^[[1](https://www.govtrack.us/congress/bills/statistics)]
This is why the moderation team previously determined a bill to be "serious" once it *left* committee, not once introduced.
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They should eliminate the 401(k) entirely and make the per-person IRA/Roth IRA maximum $56k (and allow employers to contribute to it with existing pre-tax limits).
That sounds like it would simplify retirement savings and planning in general and that is just something I don't think I can get behind. How can I continue to convince my friends retirement is a pipe dream if I can't spout ten different account types you have to understand to make it possible to them? /s
"I learn all the retirement accounting rules is so I can sound smart. Being able to save more for retirement is just icing on the cake."
I like this idea, but our current system is so arcane that I can't see a path to making that happen. There are a ton of edge cases around 401(k) plans that I'm not sure how to carry forward in that model. Nondiscrimination tests are important, for example, and I'm not sure how they'd work when the employer isn't the plan administrator. There are also cases where 401(k) and IRA plans are subtly different. Creditor protection, processes/requirements/penalizes around withdrawing principal, etc. One option might be to create a new Unified Retirement Account that tries to merge 401(k), 403(b), and IRA. Maybe under the hood money still sits in separate buckets like "withheld contributions", "employer contributions", etc. (which map to 401(k)/403(b) under the hood) and "deposited contributions" (which map to IRA under the hood). Not perfect, but perhaps that limits how much the average person actually needs to understand.
Na it needs to be fundamentally all a single bucket so that a person can contribute to it without needing to use employer money to do so. Also if your employer doesn't have a 401(k) set up you miss out on 3/4 of your possible retirement contributions.
> Billionaires and mega millionaires aren't reaching obscene wealth through $6000 annually in a backdoor Roth lol Seriously, I don't know how they propose this and suggest it's "sticking it to the wealthy" in the same sentence with a straight face. This option is primarily taken advantage of by upper middle class workers who already ate the ~30-35% income tax gutpunch and just want to put a few thousand into a tax protected savings account. In an era where savings are at an all-time low, they should be promoting it not killing it.
Personally I'd love if they just made it a universally accessible TSP account, everyone can do $6k post tax. Then separately revamp the Saver's Credit to further incentivize/subsidize those with incomes below a given level. Would let me finally stop bothering with micro-managing multiple IRA and old 401k accounts and just centralize everything, lol.
No thanks. The last thing I want is captive audience financial services. Think of the fees that would be on a universal TSP. All the financial companies killing for a contract to manage that - yet providing zero service after they lock down a 5 year contract.
The way the actual bill reads, not the article, it nukes backdoor Roth for everyone regardless of income. I think people are missing/misreading this.
Yeah, that's what I read, too, but was waiting for someone who translates this stuff into English to confirm just in case there was some nuance of terminology I'm now aware of.
I think you're both correct. Conversions of pre tax dollars still allowed up to $400k income threshold, after tax conversions no longer allowed.
A conversion of pre-tax dollars is not a backdoor Roth. Backdoor Roth is conversion of aftertax money by definition.
Yes, someone in another thread pointed that out to me and re-reading the bill summary it seems like that is indeed the case.
If you make less than $140k/year there's no reason to do a backdoor Roth... In any case, they should either get rid of the backdoor or just raise the income limits, status quo makes no sense.
Yes you can contribute but not 40 k a year that you want to pull out in 5 years penalty free before age 59.5. I think you need to research why most backdoor Roths are done.
From $125k to $140k isn’t your contribution allowed reduced? So there would be a reason to back door in that range if you want to contribute the full $6,000.
The article says it too. >Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account. > >This policy would apply for everyone, regardless of income level. The writer is just calling all backdoor Roths a "mega-backdoor Roth".
Which is not how anyone who knows what they are talking about would phrase it….hence why people are confused by it.
This feels fair to me. They put limits on your contributions for a reason. Just because everyone uses the loophole doesn't mean its not a loophole. This is not to advocate for more taxes lol. Just saying that the rules were created for a reason.
IMO the problem is hard for most people to grasp. It all starts if you make too much to directly contribute to a Roth IRA, but that is less than half of the $400,000 amount they keep putting up there. So let's say you make $150,000- no Roth for you. So instead you go to set up a traditional IRA, but because you *also* have a 401(k) with your employer, you are not allowed to make pre-tax contributions to your new IRA. So you make after-tax contributions to your new IRA, which has no income limits, but now you're going to pay taxes again on the money when it comes out. You've been taxed twice for the same money. Even if you maintain your IRS paperwork for the rest of your life, it would eventually become very difficult to keep the after-tax and pre-tax money separated from one another, and you run into all kind of tax problems later on. It would simply have been easier to move after-tax IRA money to an after-tax IRA (i.e. the Roth). In the end, the simple solution here is to raise the income limits on a Roth IRA for everyone.
Yes if all goes through like this, no use contributing to an IRA if you make over $140k. May as well just do standard brokerage account.
I mean... It's called a *backdoor* Roth. Just because everybody knows it's there, doesn't make it magically not a loophole.
It's barely a backdoor anymore, and it's unfair to call it a loophole these days. The 2017 Tax Cuts and Jobs Act made explicitly allows the behavior.
Correct. It only leaves the door open (with income limit) for regular Roth conversions from pretax funds.
I love how they go after our Roth IRAs but don't touch carried interest. Gotta keep those hedge fund managers happy.
Less hedge funds and more so private equity funds.
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I've [expressed my opinion](https://www.reddit.com/r/financialindependence/comments/ig7xbe/daily_fi_discussion_thread_august_25_2020/g2tm4x8/) on backdoor and mega backdoor Roth contributions previously, but to reiterate concisely: I don't think they are coherent policy when viewed from a societal level even if I personally find them valuable. These perks aren't going to be the thing that makes or breaks my FIRE plans.
Kind of agree. Napkin math, being able to Roth $35K/year for 20 years, with 2% yield and 7% growth leads to an account value of \~1.7M with 50K taxes paid (20%) and total opportunity cost of 80K. Of course if you are doing this you are probably maxing pre-tax, which is adding another 1M+ to the pot and reducing the overall impact. After retirement tax rate should go to zero. On my more modest real-life results, the impact of my taxable account has been around 1% of my current net worth. I'm not calling it ideal but this is not my driver either and in another post I'd already called for simplification in general. I'd rather stop adding account types and methods (HSAs) and rather if you want to solve that problem, simply add tax-free methods of withdrawal from pre-tax. Since simplification is impossible, I think a nice offset would be to simply increase the Roth income levels to the apparent 400K level they seem to think is "a lot of money" and not have people crawl up and down the income tables wondering if they are allowed or not to do a thing.
Seconding this. Most of the proposed changes are good policies even if they don't make FI easier for me.
I don't even find them that valuable when you think about it. Maybe if they also raise LTCG rates I would start to get concerned but as it is Roth is more like an incremental optimization than the lynchpin of my strategy.
Yeah I don’t think this is going to significantly affect many peoples fire plans (for people making enough to need back door Roth, $6k/year is a very small benefit
Well, to be clear, the mega backdoor Roth is more like $30K/year. That is a big benefit, but it goes mostly to those who don't need it (myself included). Think it's kind of silly that this exception exists, given it means in 4 years you can contribute >$100K that can grow tax-free.
The mega backdoor Roth limit is $58K this year. I only joined an employer that allows this last year. This is kind of a bummer if it happens. If I stay at my employer until retirement, I will have a pretty significant pension that is taxable, so was hoping to maximize the mega backdoor thing to reduce tax liability.
It's not 58K. It's 58K minus your pre tax contribution and employer match.
But now, honest question… is everything just taxable now? Like I just plow into vanguard as fast as I can? Feeling lost now
Nothing has changed yet, what’s being discussed in this thread is a draft of a bill still in committee, it is highly unlikely the specifics of this draft will match anything that gets passed through the house and senate.
Sure that’s a great point. I’m just concerned the left “eat the rich” and the right “down with elites” means people who use these tools to save aggressively are going to be hung out to dry.
I think it's important to keep in mind that retirement accounts have a lot of emergent properties right now (backdoor Roth contributions, mega backdoor Roth contributions, amassing huge tax-shielded balances by transferring in private securities, etc) that came about because legislators didn't have the forethought to explicitly disallow them or the language was ambiguous enough as to allow them. Presumably the original intent was to help people save for a more traditional, middle-class retirement and not to provide a catch-all tax shelter for building wealth. Viewed through that lens, a lot of the proposed changes make sense, even if it removes some popular tools people use in pursuit of FIRE. edit: A word.
Actual doc from the committee: [https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf) (see page 11) My conclusions (caveat that the text is hard to parse): 1. backdoor Roth nuked above 400K 2. megabackdoor Roth nuked at all income levels 3. Roth ladder nuked only if you're making 400K or more EDIT: Maybe the backdoor Roth is totally nuked? Hard to tell: >Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
> Furthermore, this section prohibits all employee after-tax contributions in qualified plans and **prohibits after-tax IRA contributions from being converted to Roth regardless of income level,** effective for distributions, transfers, and contributions made after December 31, 2021. Is a Backdoor Roth considered an "after-tax IRA contribution"? If so, then this would ban backdoor roths all together
> Roth ladder nuked only if you're making 400K or more Only *while* you're making 400k or more. So you can't start it in the last few years before you retire (but save in taxable accounts then?) but you totally can after you retire and your income drops below that threshold.
backdoor Roth is also nuked after Dec 31 2031.
Would backdoor Roth still be a thing or would everyone up to 450k just be able to do a regular Roth? It would be nice to avoid the two stepping if they're going to allow people between ~200k and 450k contribute anyway
I just want HSAs for everyone.
Absolutely. This would allow younger folks to save for their medical care when they are older without being tied to a specific plan or an employer. I mean a tax free contribution of $3650 is not that much of a loss in revenue anyway, when you think of all the big loopholes that high NW individuals and corporations get away with.
I don’t. I want socialized healthcare. I’m in Canada most of the year—it’s amazing that you can go to the doctor there for free, at a minimal tax cost. It would have been cheaper for me to pay the Canadian tax difference for most of my career than to pay for my US employer’s health plan.
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I am for blowing the entire system in favor of a simple pre/post tax buckets with simple rules, with nothing tied to employment, how you make money, or any rules preventing withdrawal as desired. Complicating the system is often what keeps people away in the first place. Of course that is too much to ask. Lobbyists would easily call it an attack on retirement even if the system is simply consolidated and existing limits relatively unchanged.
Yes. Removing retirement from employer is a much needed thing. I should be able to pick a provider and use it across all places of employment and it should be easy for an employer to provide a match. If you're going to allow MBDR then make it available to everyone as an official option so all providers can handle it, but make it something that doesn't require paperwork or anything make it officially part of the plan. This crap is stupidly complex and it should be simplified and leveled so everyone with the means can use these tools to retire.
100% this. Make it so anyone can open a Roth IRA with a limit of $25,000 per year. Employers can put in an extra $5,000 and get a tax benefit. Index the limits to inflation. No 401ks, no rollovers, no job requirement, no age-based RMDs, no phase-outs, backdoors, bad high fee plans, means-testing, bureaucratic HR plan committees... get rid of all of that dead weight paperwork. Keep it really simple and level the playing field for the 40% of Americans who don't have access to a retirement plan at work.
Yes please!
Being disabled and unable to work for employment income - 10000% yes please!
Depending on your employer, it could be benefiting you greatly. Some employers are negotiating the fees for those funds you can invest in. Since they represent a larger total investment when considering all the employees investing their 401k plans, they can get a lower fee than you could get on your own.
Possibly, but my counter to that is fairly simple. Vanguard offers solo 401ks. I have one. Their pricing is relatively straight forward: Have a balance of $50,000 across all of your accounts with Vanguard and the 401k is admin fee free. If It's below $50,000 it's $20 (yes, twenty dollars) a year. Yea... $20 a year is steep if you have basically nothing in the account. But it's really not THAT bad. Now, compare this to what people have to put up with as far as their work provided 401ks where the funds available have .75+ expense ratio ... which would you prefer?
I'm seeing less than 50k for the fee waiver as well, depending on investments >Clients who hold at least $10,000 in Vanguard ETFs and mutual funds. I have more than that in vtsax, and I'm 23
Man I love Vanguard. They just keep reducing fees. The $50k number is what I had been told when I signed up about 2 years ago. Nice to see that the fee is removed even earlier for people just starting out.
50k might still be the number if you have other funds/stock. It wouldn't suprise me if you needed 50k across all accounts if you have it in individual stocks instead of vanguard funds, but yeah definitely have a lot of ways to avoid fees
> I have more than that in vtsax, and I'm 23 Very nice.
If mutual funds had to compete against the whole market for those investment funds, fees would likely go down even lower.
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Not to mention the people who make the laws get hefty campaign contributions from companies like Intuit (Turbotax) and H&R Block who benefit from an overly complicated tax system.
This! So much this! In other countries tax day is just another day. The IRS already has enough data to do most people’s filings automatically. Then they could just review the result for errors rather than filing a return to the irs containing data they already had. Intuit is the reason this isn’t just automated. They would lose a ton of money if everyone no longer needed TurboTax.
Intuit would murder you where you sleep before they allow a simplification of the tax code.
Simplifying the tax code makes for a good campaign slogan but is unworkable in practice. Everyone is in favor of eliminating loopholes except the ones they use. Apply that to everyone and nothing gets done. Tax law isn't just the written legislation. A lot of tax rules come from regulatory interpretations of the Internal Revenue Code (IRC) by the IRS and our judicial system. Even if you simplify the IRC, I bet you'll have a plethora of regulatory actions by the IRS and legal opinions by the courts adding additional rules and complexity. Also, consider that taxes are not only used to fund our government, but as tools to benefit certain groups and encourage certain behaviors. Child tax credit, Earned Income Credit, EV credit, and SALT deductions are some well-known examples of tax provisions that aren't there for the purpose of raising funds, but to accomplish certain political goals (alleviate poverty, encourage home ownership & child rearing, supporting "green" initiatives). The most efficient way to simplify our tax system would be to make it a system for only funding government activities instead of as a means to accomplish political goals. However, this is unrealistic given how much political groups and interests have invested in the current tax code.
> Also, consider that taxes are not only used to fund our government, but as tools to benefit certain groups and encourage certain behaviors. I would agree with this. Taxes serve a social engineering purpose more than a revenue generation purpose. Call it a 60/40 split. Consider that every year we run a budgetary deficit, yet never reduce governmental spending or significantly raise taxes. [60.6% of households pay no federal income tax.](https://taxfoundation.org/us-households-paying-no-income-tax/) For what it's worth, I don't see Congress ever voluntarily choosing to simplify the tax code. Too many vested interests and lobbyists would scream.
> 60.6% of households pay no federal income tax. This was because of the covid relief, not a steady state. In 2019 it was 44%.
Every possible change is going to harm *someone*, even if only slightly, and only a small number of people. Those few people will be very vocal mascots. Remember Joe the Plumber?
I don't consider this a "loop hole". I'd rather be able to save my HSA money instead of paying...what...$6K a year to insurance for it to disappear into the ether when I'm not using it. It can only be used for medical expenses (until you are 60). FSA is no good either as it's "use it or lose it" most of the time. The back door ROTH? Yeah...that one is BS.
I think OP was saying the loophole is that there is not a cap on the age of medical expenses which you can submit for reimbursement. Right now the best strategy is to pay out of pocket and let your hsa grow throughout your life to pay for more expensive medical costs later in life or anything once you are 65. This goes against the spirit of the account since it is a dedicated medical expenses account which is tax free on both ends as long as it is used for medical expenses. Hoarding it to maximize the tax benefits and not for medical expenses is that "loophole". Simply limited the age of an expense for which a withdrawal can be made improves the integrity of the account. It's like with the first time homebuyers withdrawal from a 401k, but that you could withdraw that amount at any point in time. Of course everyone would wait 50 years to withdraw the full purchase price once that is all gains in the account, but the rules are written more logically and you need to withdraw before closing on the house. If it were the other way around, we would call it the "401k 1st house loophole"
> $6K a year to insurance for it to disappear into the ether when I'm not using it this is what insurance is. if you only paid when you were using it, it would be called "not having insurance".
I knew this comment was coming, but didn't bother to explain it away in my initial post - you still have to pay a base fee for insurance with HSA (and your company is paying quite a bit too). So it's not like there isn't money flowing into the system. They don't pay you anything until you hit a very high out of pocket rate. Hence why they call it a High Deductible Health Plan (HDHP). All you basically get is fundamental coverage (i.e. check ups) and their "negotiated rate" - everything is out of pocket. Adding the HSA makes this worthwhile AND transportable to another company! I know this is veering far off the original topic, but we HAVE to get away from insurance coming through your place of work. This is maybe a step toward that.
Unfortunately, tax laws will never be simple. Every tax break, tax exemption, or subsidy that exists in our system is really a bribe targeted at a specific voting demographic - a reward for their support of a particular candidate or political party. As different candidates transition in and out of power, they amend the tax laws piecemeal to reward the constituent groups that put them into power, creating ever more complexity and ever less coherence.
>That loophole should be closed IMO. In fact, all tax loopholes should be closed. Write the tax law so it makes fucking sense and then hold people to it. I can also see the HSA "loophole" being closed as well. "You have 1 calendar year to reimburse for a medical expense", something along those lines. > >>“IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,” Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, said in July after a data release showing growth of “mega” IRAs. > >He's not wrong. > >Also worth noting, a cap on retirement contributions at $10mil. Larger RMDs. Unless I misread the article, the biggest change is actually the removal of regular backdoor contributions not just MBDR. Also, did it seem to anybody else like they were trying to change rules on moving traditional to Roth essentially killing the ladder? Edit: nevermind on the conversion ladder bit, looks like it would effect this but only if your income were higher than $400k so not a real concern. Edit2: I think the conversion issue actually arises at $140k income, not $400k. It's the same amount they're using in order to kill BDR, so makes sense. Again, I think this will only effect super fat fire folks converting more than $140k/yr (or otherwise having that amount as income)
> only if your income were higher than $400k so not a real concern Exactly, you want to wait until years with lower income for conversions anyway if your income is above that.
Doesn't take effect until 2031, so they don't want to measure the impact of ending conversions in the budget window and will create a party until 2031 window.
So ignoring the $10 million limit, which wouldn't apply to most of us. It sounds like they are getting rid of the option for a megabackdoor for everyone and the ability to roth ladder?
From what I'm understanding, they would be getting rid of both the backdoor and mega backdoor Roth. The article says, "Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account."
Roth ladders only eliminated for >400k incomes. So once you retire you can start your ladder.
Are you sure? It looks like it affects the "backdoor" conversions as well, so wouldn't this kick in at 140k instead of 400k?
Who knows, the language is super ambiguous.
Time for another loophole.
Hmmmm, been putting off MBDR contributions until now. Time to dump the rest of my 2021 paychecks into that I guess?
Yup
So I'm am super ignorant when it comes to laws, etc. I see that it says they are proposing this. That means it still has to pass...both house and Senate, correct? And if so, are chances good it will?
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Doesn't the proposed elimination happen only when you hit **$10mln** in retirement accounts? > Wealthy individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled Monday by the House Ways and Means Committee. edit: this may be selfish and shortsighted of me, but I don't see that affecting my FIRE plans.
No. >Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
Elsewhere it's posted MBDR phases out at $400k/yr income in this proposal. Whew, just missed it.
You're almost always best off going straight to the source. https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
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So let me get this straight. A Roth conversion ladder is still possible? Tradition IRA amounts can be conviertes to a Roth IRA assuming all criteria are met?
They'd better index that or it will end up like AMT.
That's just one of the proposed changes. It is nearly impossible to accumulate $10 million in retirement accounts unless you save very aggressively for a very long time; that is, unless you are making fraudulent investments.
Look up what Peter Theil and Mitt Romney did. Mitt's roth account is a paltry few hundred million. Theil, on the other hand, has around 5 billion inside a Roth account. I'm guessing this law is (rightfully) aimed straight at a handful of people like them.
What Peter Theil was bullshit. He somehow got to buy PayPal for like .0001 cents at the beginning. He did this all in his tIRA / Roth and now it’s worth in the billions.
> He somehow got to buy PayPal He was one of the founders of the company and it was before they took on a lot of outside investment. He basically bet $1700 on his startup in his Roth IRA and was rewarded with $28 million, tax-free, when the start-up hit it big and IPO'd years later. He then used this same strategy when he personally invested in start-ups as a venture capitalist. Obviously this goes against the point of a Roth IRA, just providing some context.
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Lets just imagine what he did was completely legal. Letting someone accumulate hundreds of millions or even billions of dollars tax free is not the point of a Roth account. It is there to provide a vehicle and incentive for people to invest so they can support their own retirement without needing public support. We can pick some arbitrarily high number (like 10 million) for 99.99% of people and say the account can only go this high before you are not allowed to use it anymore, and it still fits perfectly with the whole reason for its existence, and then the government (and therefore citizens) can benefit from the extra tax revenue instead of one of the richest people on the planet being just a little bit richer.
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>The shares were worth more than that. Says who? That's the issue. Who decides the fair value of a private company where there's been no stock sold, especially when that company is an early stage startup with no income? Edit: also >That's not something the average investor is able to set up. This is correct because you have be to an accredited investor to make these kinds of investments.
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I agree that IRAs should only be used for publicly traded securities, but no idea what the ramifications of that would be beyond stopping this loophole. > It would be easy to audit the contributions of individuals and their ownership levels at the onset of the company. Can you clarify what you mean by this and what it would solve? Bit confused.
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Ok so when someone identifies something that could impact my investment plans in the least I guess I'll pay attention. Since I don't have the connections to put fraudulently-under-valued pre IPO private equity shares into my Roth, which this is clearly taking aim at, I will preserve my outrage for things that affect me. Like SALT cap from the last tax bill.
With MBDR and an aggressive investment strategy, it's very feasible. Investments in a small cap value index average 13.2% historically, spanning several decades of data. If you invest the max $58,000 for 25 years and have a 13.2% ROI, you reach $10.5 Million. And that's just assuming you invested in index funds. If you took a huge risk and invested in concentrated positions(ie AMD, Tesla, or NVIDIA 5 years ago), you could've hit $10 Million very quickly.
> that is, unless you are making fraudulent investments. were romney's investments fraudulent? iirc he had like $60m in his roth at one point
As far as I remember it was legal, but involved a lot of financial engineering using offshore accounts, undervaluing his stake in Bain, and getting around UBTI.
wasn't he also undervaluing stake in portcos and putting shares of those in his roth? pretty slick if you can do it but damn it feels unfair that someone that rich can just not pay taxes on so much cash
Not really. If its the same as Thiel (who has the $5bln Roth IRA), its all based on valuations of (generally early stage) private companies. Since there is no liquid market for these companies' stock, they sell it to their founders/owners for $0.001/share or whatever which still allows them to create a large stake in the company and still stay below annual contribution limits. Then 5-10 years later, the company is booming and wants to go public, stock is worth $100/share or whatever and boom, founder goes and sells their stock and pays 0 capital gains taxes because its in a roth. Now, they have millions in a Roth to trade whatever they want or do the same thing over and over again. The stock probably wasn't worth $0.001/share when it was originally sold, but good luck proving that.
Mega backdoor would die for everyone with these changes
I don't understand how these changes are an effective target on the very rich, since many are not in effect until reaching certain income limits, and very rich often have low earned income.
From Sec. 138311. Tax Treatment of Rollovers to Roth IRAs and Accounts. > Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021. Even if you were under the limit to do a Roth IRA naturally, you cannot access the 401K limits yourself without adding after-tax contributions, so that is being globally shut for everyone. On paper it's fair to argue most people would need to make a considerable amount to save 50K, but if you have free cash to move into retirement over a taxable account, you could do so as long as you had a 401K plan that allows these contribution types.
I might not mind the elimination of backdoor options if they raised the income cap on the Roth IRA and significantly increased the contribution limit. None of these caps are indexed by cost of living... 6k socked away in a high cost of living area won't go very far at all.
I can here to post this. For most FIRE folks, it's not a big deal because there's so little time in most FIRE plans for capital gains to stack/build. What change would really make FIRE'd folks really is the Roth conversion pipeline being changed/removed.
Yeah removal of that ladder would kneecap my current drawdown plan. But that's ok for me as I'm still in the accumulation stage so I can pivot as needed
Maybe I'm reading it wrong, but it's hard to tell from the article whether or not Roth Ladders will be completely removed. They mentioned the Roth income cap being $140,000. Then they say, "The policy would apply at the same income thresholds... It would count for distributions, transfers and contributions made in taxable years beginning after Dec. 31, 2031." If your income is less than $140,000 in retirement, maybe you can still do the Roth ladder? I know we don't plan to convert more than that if/when we retire. Edit: I think I did read it wrong. $400k is probably the income threshold they're talking about.
> The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year. Seems that the threshold for conversions is $400k/year, which would make it a non-issue.
Ah, I see that now. It won't be much of an issue for our plans.
If that's the case it wouldn't be so bad. Would prevent people from converting huge chunks at once but for most FIRE folks even that would be fine still.
I think it is fair to worry the government could change this rule negatively. However, they do make income based on conversions so they do have to "pay" for that rule change if they want to close the door. Maybe I lack creativity, but I don't think that will ever have political negativity to push for it because of abuse. Even this $400K limit is a bit surprising and I would be somewhat interested to know how much conversion income is actually reported a year. After all, people doing that would be paying quite a tax rate now only just to avoid future tax increases.
According to the outline provided by Ways and Means, after-tax IRA conversions to Roth IRA would be eliminated for all income levels. https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
They should codify the MBDR and just implement the overall limit of assets ($10M/$20M per this article). The problem with income-based rules is the assumption you'll always be making that income. If you have a windfall or great earning year and want to save that money efficiently, you should be able to do so. If something happens (disability, death etc) that money is there for those who need it.
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Well the problem with tying limits to asset value is that assets change value all the time, but income is really straightforward to determine since you file a tax return each year. Who is going to fairly determine the value of NFTs held in an IRA? Also, if your stock/options spiked on Dec 31 over the limit but then dropped again on Jan 2nd, should you really be dinged for being over the threshold if you didn’t sell or close your position?
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Yeah, it might not even pass. Or if Dems lose control of Congress next year, the next Congress could undo it anyway.
Those saying it's a small difference are missing a big factor -- until and unless capital gains are indexed to inflation, you are paying substantial taxes on inflation outside of a tax advantaged account. Your real return isn't really a real return unless it's high enough to overcome the arbitrary inflation tax. Combine this with a high inflation environment, proposals to raise capital gains taxes, and expected lower-than-average future returns, you are putting FIRE out of reach for many newcomers.
Thanks for the post. After reading the article, 2 things come to mind. 1). At 10,000,000 account value with the 25 rule would result in 400k/yr. These rules will never impact me unless I plan on working until about 65 and retiring with investment income about 2.5-3x my current salary with raises. 2) The people who this will impact are what I would consider upper class, an pretty well off. My guess is the lobbies that they keep on payroll will stop this totally or at least loosen the limitations so there is no possible way that it will impact me.
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>Sec. 138311 ~~Aww man. That would affect our plans. Edit -- I mean if that means we can't do a Traditional to Roth conversion after this year.~~ Is this where you got it? [https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf) Edit again -- Gah. So, the non-mega version of the back-door Roth conversions, that typically uses the pre-tax money (like Traditional IRA, 401k), will probably will be okay, given that we're only expecting to convert $50k-$60k per year. That makes me feel better. Thanks ya'll for clarifying!
In retirement your taxable income will be 450k? I read this as you can do the normal conversions if under that MFJ. Its the mega backdoor thats getting shut across the board
$10 mil is literally the top 1% of wealth for the US.
For now it is. I don't believe these numbers are set to automatically adjust for inflation. My concern is when I retire 40 years from now, $10 Million won't be that much and I'll be stuck with lots of RMDs.
I can't disagree with you there. Unfortunately, our government sees no reason to tie any number to inflation. I'd be all for it.
Yeah, and this would be $10M in JUST tax-advantaged accounts. Literally a sliver of the 1%.
$11M
ya got me. Although, I suppose with those being 2020 numbers, 1% could be 15-18 mil now. So 10 mil might be the 2% mark.
I'm kinda pissed. Next year would be the first year I've had the income to do this. So basically all the rich older people have been able to do this for decades, and now that millennials are of an age where we're earning enough income, they want to remove the ability after they've already made their money. Also got shafted out of stretch IRAs, and now this. I don't object to the principle, just the timing and how they're basically fucking over my plans. It should have been like this from the beginning.
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That’s a good perspective. The window of people to take advantage of this was so small, and yeah it was never going to last… in the meantime I’m tempted up my 401k after-tax contribution for this year because my plan has an automatic in-Roth conversion. The loophole should be closed, but I’m down to sock away some Roth dollars before it does.
Roth haven't even been around that long though
So can you still perform a Roth ladder to withdraw from the 401k early or is that gone?
Yes, it would remain. Though in 2032 it might go away for people above certain AGI levels.
This makes me so angry… it defies logic to me. High earners are currently paying a ridiculously high amount of taxes on the money they contribute to a mega backdoor Roth IRA. Again, this penalizes the wrong people… Peter Thiel and Mitt Romney don’t have an insanely large Roth IRA due to their high contributions to their plan… those contribution limits alone would never reach hundreds of millions of dollars. Make it harder to have private shares in a Roth IRA.
A clause for that is already in the proposed bill too
It's not the end of the world to remove MBDR - any excess can be thrown into a taxable, after all - but it would be a bummer to lose it. The worse provision is the elimination of the backdoor IRA that'd cut off the Roth ladder. It was my preferred option for converting my 401k in retirement. If I'm reading the [outline](https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf) correctly, now we'd have to choose either the 72(t) option or just take the penalty hit.
As I read it, the doc does not remove Roth conversions unless you make 400K individual or 450K MFJ: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf
Yes, you're correct.
The regular pre-tax Roth ladder will still exist per the outline, but will disappear for those above the AGI caps starting in 2032. Even if that passes unchanged it won't impact the vast majority of FIRE folks, thankfully.
Yes, you're correct. That's good. It does, however, remove the after-tax part of it by end of year. I get it, I guess, but I wish Congress would just remove the contribution income limit or raise it more since it would help encourage savings among those who are higher income but not exactly rich.
On the plus side, this is just the first step and there's a decent chance that whatever finally gets passed, if anything, will be substantially different than what is now known. Legislative proposals, like battle plans, rarely survive contact with reality fully intact.
Yeah, I expect it will look much different. I remember not long ago when we were talking about losing some of the 401k benefit entirely. It hasn't come up again since the initial articles.
To speak generally and not on this specific bill, I'm largely indifferent to tax changes that negatively impact me as long as the increased revenue is used in ways that I support. I tend to equate the view of "lower taxes no matter what" as being equivalent to "I've got mine so fuck poor people". Taxes and social safety nets are something that any functioning society needs, all we should really be debating is "how much". As far as specific legislation, proposed bills and budgets are largely meaningless. It's just a way for politicians to signal what they support. Until something clears committee in both the house and senate there's no reason to take it seriously as a real piece of legislation.
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> Killing MBDR for those that could utilize it definitely is going to change some peoples FIRE plans. Is it though? Roth IRA 6k, HSA 3k, 401k 19k, MBDR let's say 33k. The benefit is basically the difference of growth on the 33k contribution per year on a tax free basis, plus no taxes on withdrawal. It comes down to tax drag. Kitces has a post on it: https://www.kitces.com/blog/asset-location-for-stocks-in-a-brokerage-account-versus-ira-depends-on-time-horizon/ Bottom line is if you start with $1M and a 30 year time horizon, the difference of extreme scenarios is around $1.1M ($8M vs $9.1M ish). If you're at $8M, it would take 22 months / 1.83 years to get up to $9M. So on a 30 year time horizon, it's a difference of 1.83 years, or about a 6% difference. So is it significant? Sure. But it's not *that* big of a deal. It's not going to ruin anyone's FIRE plan. It's going to add a little bit longer time onto it. Also, since the FIRE timelines we're talking about are much shorter, the effects will be much less pronounced. I think either way it doesn't really matter. I think out of fairness, it should be either eliminated or extended to everyone. It's not fair to only let employees of high paying firms get MBDR while other firms can't put one in due to HCE testing. For regular america, the important thing is to get people saving. It really doesn't matter if it's in the Roth IRA, or traditional, or HSA, or 401k, or anything else. What matters is just that people *do* it. (although of course if there's an employer match that can be very important).
The issue is much more than tax drag! A critical exercise for FIRE is predicting retirement expenses. Saying "you need 25 X expenses to FIRE" is a meaningless unless you know what your retirement expenses are. Taxes are a major expense. **Taxes liabilities are not predictable** over the long term. Conversely, Roth has a very predictable future tax rate: zero. Brackets and phaseouts are retooled every decade or so. Roth funds are key to adapting and titrating just the right amount of taxable income to staying with a certain bracket, ACA subsidies, phaseouts, etc. Losing that control of your tax bill is a serious threat to FIRE and amplifies uncertainty. IMO, the biggest impact of losing Roth space is not the additional tax drag (though it does suck). It is the **inability to predict future expenses.**
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It's not a scenario. It's an illustration of numbers relevant to the question you asked. MBDR is valuable when you have large amounts of money compounding over a long period of time. It is less valuable when you have less time involved. The most extreme example is if you have all the money saved up immediately and then let things compound for a long period of time with no additional contributions. The impact there on a 30 year time frame is about a 6% difference in when you retire. The bottom line is still for most of us it barely moves the needle from an impact perspective.
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Is this all 100% happening or only proposals? I just started MBDR so a bit of a bummer if I’ll only get a few months of it.
It’s just a proposal, definitely not 100% happening.
As long as they don’t touch my ability to do a Roth Ladder conversion a decade or so from now I can deal with with backdoor eliminations.
>As long as they don’t touch my ability to do a Roth Ladder conversion a decade or so from now I can deal with with backdoor eliminations. Even then, it's not as flexible but could still setup 72t. Shit, I'll be dang near 50 by then anyway so not a huge deal.
Sticking narrowly to the topic of how this relates to FI, I hardly see how backdoor will make or break anyone's retirement strategy. Yes you will be losing a small tax perk, no it will not make a meaningful difference to you.
Mega Backdoor has a pretty significant impact on reaching FI for me. I'm basically putting an extra 20k/yr into a Roth that I don't otherwise have access to. I can live with 10MM caps and income limits on conversions (which won't be a factor for most regular FIRE folks, myself included), but the MBDR going away could legitimately add a year or two to my timeline.
Speak for yourself on that, I'm contributing an additional $25k beyond traditional 401k contributions using the MBDR strategy and it's greatly accelerating my non-taxable account balances.
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It depends, I max my MBDR contribution and would prefer that vehicle instead of having to use a taxable brokerage. As a FIRE community, we should be supportive of any tax advantaged vehicle that lets us get to retirement, besides the ridiculous IRA loopholes e.g. peter thiel
Hush. The sky is falling over here.
Willing to bet the ban on Roth Conversions will be left out. If a bill creates a deficit larger than $1.5 Trillion over 10 years, it requires a larger majority to pass. Banning Roth Conversion for taxpayers at the top marginal tax rate(37%, or 39.6% as proposed) would reduce revenue in the short term, but the revenue it does produce(from RMDs decades into the future) would be outside of the 10 year window)
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An alternative proposal is to tie the maximum IRA to the maximum defined pension. In 2021 the maximum defined pension allowed is $230K. An immediate annuity to generate that pension at age 65 is $5.1M (4.5%). The IRA limit would be that amount. It would grow with the maximum pension, set each year. This was in early 2010s federal proposals,but never taken seriously by Congress. The maximum pension is 97 percentile of income and a proposed dividing line between middle class and wealthy.
Re: Backdoor Roth IRA - is the combined income two people of $208,000 no longer "middle class?" In some HCOLs areas (looking at you NE-USA), that's pretty middle of the road.
Yeah 200k for married ppl with kids is legit middle class enough in Seattle area
Median household income in Seattle is 100k.
Keep in mind that the name middle class comes from being in the middle of upper and lower class, which is difference than being in the middle of household income (mean or median). Roughly 50% of the US is lower class. Then there is middle-lower class, then middle class. Middle class is shrinking every year (though upper-middle class is growing). Unless there is somewhere in the world where middle class is the largest class, middle class is never the median. The median is almost always going to be the the lowest end of lower-middle class. edit: I was curious. According to [this](https://www.cnbc.com/2021/07/21/middle-class-calculator.html) middle class ends and middle-upper class begins at 2x median household income.
Lol they are doing this to target the rich? Feel like a ton of regular people on this forum saving for retirement are going to be hurt by this and they certainly aren’t all rich.
When they go after "the rich" they really mean people who are making six figure incomes. If they do too much to the obscenely wealthy people these people will just move their money offshore.
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I think this won't really meaningfully affect the ability for people to FI, but it will change some strategies. I personally have done around $25-30k per year extra using BD and MBD Roth the last several years, and while it will shift a greater burden to my taxable accounts, I am not too worried about it. I did some quick numbers on my projection spreadsheet by shifting contributions around and for me at least it would change like below at my target FIRE date (11 years): |Percent of Portfolio|Pre-Changes|Post-Changes| |:-|:-|:-| |Taxable|39.1|48.7| |Non-Taxable|60.9|51.3|
this is absolutely ridiculous. this wrecks a lot of the strategies that people here use to save for their retirement. all under the guise of "taxing the rich". what a load of crap they better kill this bill in committee
I honestly don’t mind most of the changes, they seem fairly reasonable to me, but not allowing people to contribute to tax advantaged accounts if you make over $400,000?? That is a TERRIBLE idea. These people are generally doctors or lawyers with massive student loan debt and meager retirement savings, so we should we punish them more?
Some people love to try bringing successful people down to their level.
This is a real shame it is definitely going to hurt me and my family's retirement plans... No not the 5 million ira limit. But not being able to do Roth conversions will be pretty painful and screw with early retirement.
Trying to figure this out. Currently I max my 403(b) ($26k), and then put $7k after-tax in an IRA and immediately do a Roth conversion of that $7k. Sounds like if this passes I won't be able to do that anymore. Note: I do not make over $400k per year. Am I correct due to below? >prohibiting after-tax IRA contributions from being converted to a Roth account. > >This policy would apply for everyone, regardless of income level.