Next year, I'm looking to convert $7,000 from my traditional IRA to a Roth IRA, which is something I've done every year. But I hear that some Roth conversions may be eliminated in 2022. Can you let us know when/if this new bill is passed, and how should I go about converting money from my traditional IRA?
On Nov. 19, the U.S. House of Representatives passed a bill that imposes new limitations on Roth conversions. But even in the highly unlikely event that that bill clears the Senate without any changes, it wouldn't affect your 2022 conversion.
The House bill eliminates "backdoor Roth conversions" starting in 2022. Those are Roth conversions of after-tax 401(k) contributions and after-tax contributions to traditional IRAs. Backdoor Roth conversions typically are used by individuals whose high income disqualifies them from contributing directly to a Roth IRA.
By contrast, Roth conversions like yours are transfers of pretax money from a traditional IRA to a Roth IRA. They wouldn't be affected next year. But if the House bill becomes law, starting in 2032 single taxpayers earning more than $400,000 a year and married taxpayers filing jointly with more than $450,000 of yearly income will no longer be able to convert money from a traditional IRA to a Roth IRA.
Starting in 2029, the bill also bars IRA contributions for people whose income exceeds $400,000 (single taxpayers) or $450,000 (married filing jointly) and whose combined retirement account balances — including IRAs, 401(k), 403(b) and 457 plans — total $10 million or more.
And regardless of their age, people whose annual income and total retirement account balances exceed those limits would have to begin taking taxable yearly distributions from the accounts.
The bottom line
Proposed legislation will impose more restrictive retirement account rules on high-income individuals.
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