Reply to Bill proposed to crack down on backdoor roth (and other loopholes)

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[quote=Anonymous]The person who kept trying to tell me that a backdoor Roth is not post-tax is wrong.  I'm a tax attorney who has been audited on backdoor Roths with no adjustment.  I know what they are and how to do them.  Backdoors are post-tax traditional IRAs (or 401(k) contributions, if your plan allows) that you then convert to Roth.  People have to do it that (agreed--dumb and confusing) way because they're over the absurdly low income limits.  Otherwise they'd just use the front door.

Normal Roth conversions are where you take pre-tax money and convert it to Roth, paying tax in the year of the conversion.  That will still be allowed for 10 years, and allowed indefinitely for people making under 400K.  People do these when they have savings in pre-tax IRAs followed by years of lower tax brackets (maybe you worked before entering law school or medical school and do the conversion while you're in school, maybe you retire early...)  The 400K isn't indexed to inflation for the next ~10 years though, so have fun with that if you think you're not "rich" enough to be targeted now, with this inflation you may be soon.  The people newly paying the Obamacare net investment income tax (ahem), which was supposed to target the wealthy a decade ago, who are making 250K total HHI in 2021 can tell you how that feels.

Pretax traditional IRAs are the thing that are mathematically the same as a Roth IRA, it's just a gamble on your taxes being lower in retirement.  The choice between pre-tax traditional and Roth is solely a gamble on tax rates now vs. later (as well as RMDs, changes in law, etc, but the tax rate differential is the big one).

Post-tax traditional IRAs isn't just a bet on tax rate differentials and do not make sense for many people.  Distributions are ordinary income.  They will be subject to RMDs.  In a taxable brokerage, you control the timing of the gain recognition and most assets are taxed at the lower CG rate, even the dividends it throws off mostly get a preferential rate.  Almost everyone is better off putting the money in a taxable brokerage account into an ETF or stock, and holding the assets until you die and hand it to your kids tax-free.  I honestly don't know who they make sense for, but maybe someone can tell me.  If the backdoor Roth goes away, my money will still be going into a taxable brokerage, not a post-tax traditional IRA, and I'm childless, FWIW.[/quote]

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