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Is the Door Closing on Backdoor Roth IRAs?

The 'mega-backdoor Roth IRA' is on the chopping block, too, but neither is a done deal.

On Sept. 13, Democrats on the House Ways and Means Committee, led by Chairman Richard Neal, released a wide-ranging tax proposal that, if enacted into law, would affect corporate taxes as well as income and capital gains taxes, the estate tax, and the tax treatment of retirement account assets.

Of course, the proposal is just that--a proposal--and it will need to pass through a deeply divided Congress before it becomes law. Given that, it may be tempting to ignore the whole thing until there’s something final. But aspects of the proposal, if they become law, are quite time-sensitive. A higher capital gains rate would be retroactive to Sept. 14, 2021, but most of the proposed changes would go into effect in 2022. That leaves open a small window for individuals to enact changes in their financial plans between now and year-end.

While many aspects of the proposal will have a significant effect on people with a lot of income, wealth, or both, the changes to the backdoor Roth IRA and to a lesser extent the mega-backdoor Roth IRA merit attention because they’re currently in use among more-mainstream investors (that is, you don’t have to be super-rich to be taking advantage of them).

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