Tax strategy of the rich, backdoor Roth survives in latest Democrat

A retirement tax strategy favored by the wealthy survived in Democrats’ latest social and climate spending plan, after an earlier version had it on the chopping block.

So-called backdoor Roth strategies are a way for the rich to skirt income and savings limits that apply to Roth individual retirement accounts.

At its simplest, the strategy involves an investor contributing money to a non-Roth account and then converting it to a Roth IRA.

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Roth IRAs yield two big benefits for the affluent: Neither investment growth nor account withdrawals are taxable if funds are pulled out after age 59½, and there are no required minimum distributions starting at 72, as there are with traditional retirement accounts.

“The reason rich people do this is they don’t want to pay taxes on their investments,” said Albert Feuer, a tax and employee benefits attorney in Forest Hills, New York. “The fact they don’t have any RMD rules supercharges [the accounts] even further.”

The House Ways and Means Committee proposed ending the loopholes as part of a broad package of reforms to make the tax code fairer and raise money for Democrats’ social and climate agenda (which was then envisioned at up to $3.5 trillion). The Committee passed the measures in September.

However, a $1.75 trillion Build Back Better framework issued Thursday by the White House — the result of months of negotiating between moderate and progressive lawmakers — would keep the loopholes intact.

The new vision of tax reforms also omits many other retirement measures included in the House package, such as new RMD rules for accounts of more than $10 million.

However, negotiations are ongoing and retirement rules may re-emerge — especially if Democrats add measures that raise the legislation’s total price tag and need to find new funding sources.

Those may include, for example, changes to the current $10,000 cap on a federal tax deduction for state and local taxes.

“Until we actually have a law, we can’t be sure what’s going to be in it,” Feuer cautioned.

Current law disallows any contributions to Roth accounts for single taxpayers whose annual income exceeds $140,000. (The limit is $208,000 for married couples filing a joint tax return.)

However, the law allows higher earners to convert funds in a pre-tax IRA — which doesn’t have an income limit — to a Roth IRA. (They must pay income tax on the converted funds.) Such pre-tax IRAs may hold a substantial sum of money from a 401(k) plan whose funds were rolled over.

(While there isn’t an income limit for contributions to pre-tax IRAs, high earners can’t claim a tax deduction for…