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

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]BTW, actual text of bill is available:  https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf

I didn't read it because it seems dense/boring, and doesn't really matter to me.  I'll just wait to see what (if  anything) actually passes.

I did accelerate my backdoor roth plans for late 2021, with the assumption it may not be an option for 2022.  If it doesn't pass, then I'll just be a little ahead for 2022 and slow down savings in the first part of the year.[/quote]

[b]How are taxes handled on the forced withdrawals from mega Roth IRAs? [/b] I couldn’t find that in the bill.[/quote]

Why would there be taxes?  It's a Roth IRA.[/quote]

If you withdraw any profits from a Roth IRA before you turn 59 then you owe taxes today, but in the event of a forced withdrawal, I'm pretty sure it would have to be made tax free for everybody.  Otherwise you'd have an awkward cliff and terrible optics ie. Warren Buffet and Mitt Romney withdrew tax free but somebody who had just turned 58 had to pay 40-50% tax on their withdrawal.  Not to mention other issues of basic proportionality and fairness.  It's really Congress' fault for creating the Roth loopholes in the first place.[/quote]

I think you are asking about the proposed required distributions if your roth is very large, over $10M?  This proposal states this only applies if your income is &gt; $400/450k, BTW.

I can't make sense of the actual bill text to answer that question for you.  I'd be a bit surprised if they allowed it to come out tax-free, but I also see your point about age not really being the main point, espeically at balances of $10M+. [/quote]

But Peter Theil would owe taxes on nearly $5B.  I can't imaging they let that skate away.[/quote]

That would fundamentally change the Roth IRA account. They appear to be making these excess funds required minimum distributions which would be at whatever tax rate applied for that type of distribution(I.e. no taxes for Roth IRA distribution)[/quote]

Agree. As I read it, the Roth IRA could no longer be allowed to grow into perpetuity once it reached the $10M threshold. At that point, RMDs would need to be taken by whomever holds the account.

My guess is that the law would require RMDs at the latter of $10M account balance or reaching 59.5 years of age.  If you forced RMDs before 59.5 years of age, there would be a 10% penalty. Or perhaps they will waive the penalty? It's not clear to me.[/quote]

The thresholds being proposed are &gt;$10M combined total of traditional and Roth IRA and defined contribution plans (e.g. 401k).  Distribution requirement would be 50% of anything over $10M and 100% of anything over $20M and must come from the Roth accounts first. This only applies to high income earners.[/quote]

Were you able to track down whether/where the 10% early withdrawal penalty on Roths is waived?  I’m not used to reading such convoluted legislation.[/quote]

DP.  I would expect the 10% penalty to be waived (since its is forced), but you may have to pay taxes on the gains. I did not read this in the bill because I can't make sense of that without spending a lot of time doing so... but a summary news article stated taxation was unclear.

It is sort of fundamentally changing the Roth IRA, yes, but in order to have amassed &gt;$10M (or.... &gt; $1B) prior to the age of 59.5, a taxpayer has likely already fundamentally gone around what the Roth was meant to be.  Yes it followed the law. I agree it is complicated.  It will be interesting to see how this develops.   I very much  hope the close the loophole going forward  at minimum.  I don't feel particularly bad for anyone who has to paid some taxes on a balance &gt; $10M, but I definitely see the argument against that....  [/quote]

In full disclosure I have a vested interest in this because I have &gt;$10m in a Roth but am under 59.  I interned at Apple and fell in love with the company and built up a Roth with AAPL stock in the early 2000s.  I've held most of it to this day.  I'm sure I am part of a small (very lucky) group, but I thought I was playing by the rules.  If I had bought these shares outside of the Roth, I could just leave them as is.  But because they are inside the Roth, I'll be forced to sell some and not even at short-term capital gains prices?  I'm not going to be hurting either way but at some point it seems fundamentally unfair and would shake one's belief in any promise made by the Government in the future.
[/quote]

You could just keep HHI &lt; $400/450k?  Is that possible??

I get what you are saying (and I have my tiny violin ready).  Congrats on your success with AAPL![/quote]

Yes, my HHI is under that already but then I live my life actively avoiding any bonuses or increase in salary I suppose?

Just seems a little nutty that Warren Buffett and Mitt Romney would cash out tax free while somebody in their 40s or 50s would pay a 50% tax rate.  They must really hate Peter Thiel to propose such an erratic law targeted at such a tiny group of tax payers.  I hope they recognize there may be other folks caught in the crossfire.[/quote]

Newsflash - you are not caught in the crossfire, you are part of a group of taxpayers who are targeted.  This is a feature, not a bug.

As for "it seems fundamentally unfair and would shake one's belief in any promise made by the Government in the future," don't be ridiculous.  Tax laws change all the time, sometimes they benefit you, sometimes they don't.  But that fact that they change is not, in and of itself, unfair.  Does it sting?  Sure.  Unfair?  Of course not.  At least this one is targeted at people who can afford it.  [/quote]

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