Rollovers and Conversions to Roth IRAs and Designated Roth Accounts: Proposed Changes in Budget Reconciliation
November 5, 2021
Rollovers and Conversions to Roth IRAs and Designated
Roth Accounts: Proposed Changes in Budget Reconciliation
Introduction
Qualified Plan Contributions and Withdrawals
Individuals can save for retirement through tax-advantaged
A qualified plan is an employer-sponsored retirement plan
vehicles such as Individual Retirement Accounts (IRAs)
that receives special tax treatment, such as a 401(k) plan, a
and qualified retirement plans (for instance, employer-
403(b) plan, a 457(b) plan, or a defined benefit (DB) plan.
sponsored 401(k)s or defined benefit plans). Individuals
Employees and/or employers make contributions to a
may be able to roll over savings in one type of qualified
qualified plan. Plans may permit various types of
plan, account, or IRA to another type subject to a number of
contributions.
requirements. Section 138311 of H.R. 5376, as reported by
the House Committee on the Budget on November 3, 2021,
Pre-tax contributions lower an individual’s taxable
would modify certain rollover rules.
income. Withdrawals of savings (i.e., contributions and
any investment earnings) attributable to pre-tax
IRA Contributions and Withdrawals
contributions are included in taxable income.
IRAs are tax-advantaged investment accounts for retirement
savings. Congress has authorized two types of IRAs:
Designated Roth account contributions do not lower
traditional and Roth. Eligible individuals may contribute to
taxable income. Qualified withdrawals from designated
their IRA(s) up to the IRA contribution limit ($6,000
Roth accounts are not included in taxable income.
[$7,000 for individuals age 50 and older] in 2021).
After-tax (non-Roth) contributions do not lower taxable
Traditional IRAs. Anyone with wage income can
income. Withdrawals attributable to after-tax (non-Roth)
contribute to a traditional IRA. Contributions to traditional
contributions are not included in taxable income,
IRAs may be deductible from taxable income (i.e., they
whereas investment earnings attributable to those
reduce taxable income). Deductibility of traditional IRA
contributions are included in taxable income.
contributions is phased out based on adjusted gross income
(AGI), tax filing status, and household workplace pension
An individual’s pre-tax and designated Roth account
coverage. Individuals who cannot deduct part or all of their
contributions (called elective deferrals) cannot exceed
traditional IRA contributions can make nondeductible
specified limits ($19,500 [$26,000 for individuals age 50
contributions.
and older] in 2021). After-tax (non-Roth) contributions are
not subject to the elective deferral limit. However, total
Deductible IRA contributions reduce taxable income.
contributions (which include elective deferrals, employer
Withdrawals of deductible contributions (and any
contributions, and any after-tax [non-Roth] contributions)
investment earnings) are included in taxable income.
cannot exceed specified limits ($58,000 [$64,500 for
individuals age 50 and older] in 2021). After-tax (non-
Nondeductible IRA contributions are not deductible
Roth) contributions are typically made after an individual
from taxable income. The portion of a withdrawal
has already contributed the maximum amount of elective
attributable to the nondeductible contributions is not
deferrals.
included in taxable income. However, any investment
earnings that have accrued are included in taxable
Rollovers and Conversions to Roth IRAs
income.
and Designated Roth Accounts
Individuals can preserve the tax benefits of their retirement
Roth IRAs. Individuals with AGI under specified limits
savings through a rollover. A rollover is a transfer of a
can contribute to a Roth IRA (e.g., a single filer with an
portion or all of the savings from one qualified retirement
AGI of less than $140,000 in 2021).
plan, account, or IRA to another plan, account, or IRA. In
general, a conversion is a type of rollover that occurs when
Roth IRA contributions are not deductible (i.e., they are
savings are rolled over from a traditional IRA, qualified
made from after-tax income). Qualified withdrawals
plan, or account (which includes any after-tax [non-Roth]
(which include contributions and any investment
savings) to a Roth IRA or designated Roth account.
earnings) from Roth IRAs are not included in taxable
income. Qualified withdrawals are those made (1) after
Prior to 2010, conversions to Roth IRAs were limited to
age 59½, death, or disability and (2) from accounts that
taxpayers with AGI of less than $100,000 (to prevent high-
have been held for at least five years.
income taxpayers from indirectly funding Roth IRAs). The
Tax Increase Prevention and Reconciliation Act of 2005
(TIPRA; P.L. 109-222) eliminated the AGI limit for Roth
conversions beginning in 2010. As a result, individuals
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link to page 2 Rollovers and Conversions to Roth IRAs and Designated Roth Accounts: Proposed Changes in Budget Reconciliation
have been able to circumvent Roth contribution limits by
In summary, Section 138311 would prohibit (1) all
converting (1) traditional IRA funds to a Roth IRA or (2)
taxpayers from funding Roth IRAs or designated Roth
after-tax (non-Roth) funds in a qualified plan to a Roth IRA
accounts through backdoor or mega backdoor methods
or designated Roth account. This is sometimes informally
starting in 2022, and (2) high-income taxpayers from
referred to as a backdoor Roth IRA or mega backdoor Roth,
converting pre-tax savings in qualified plans or IRA savings
respectively.
attributable to deductible contributions to Roth IRAs or
designated Roth accounts starting in 2032.
Backdoor Roth IRA. A backdoor Roth IRA refers to the
conversion of traditional IRA funds—typically after making
Table 1. Table 1. Rollovers to Roth IRAs and
nondeductible IRA contributions—to a Roth IRA.
Designated Roth Accounts
Current tax treatment and proposed changes in H.R. 5376
Mega Backdoor Roth. Because contribution limits in
qualified plans are higher than those for IRAs, individuals
Current Tax
who convert qualified plan savings to Roth IRAs can fund
Treatment
IRAs in amounts that exceed IRA contribution limits.
Rollover Type
of Rollover
Similarly, individuals who convert savings in after-tax
Would be prohibited for all taxpayers after 2021
(non-Roth) accounts to designated Roth accounts (in an in-
plan conversion) can fund Roth accounts in amounts that
Traditional IRA (nondeductible) to Roth IRA
exceed elective deferral limits.
(sometimes called a backdoor Roth IRA)
An individual’s ability to convert savings attributable to
After-tax (non-Roth) savings in qualified plan Earnings
after-tax (non-Roth) contributions from a qualified plan to a
to Roth IRA (sometimes called a mega
included in
Roth IRA depends on how the qualified plan is structured.
backdoor Roth IRA)
taxable
The plan must permit (1) after-tax contributions and (2) in-
income
After-tax (non-Roth) savings in qualified plan
service distributions for non-hardship reasons. In-service
to designated Roth account in qualified plan
distributions are withdrawals taken while an employee is
(sometimes called a mega backdoor Roth)
still working (generally after reaching a specified age). A
Plan Sponsor Council of America Survey of 401(k) and
Would be prohibited for high-income taxpayers
Profit-Sharing Plans found that 20.9% of plans permitted
after 2031
after-tax contributions and 56.3% permitted in-service
Traditional IRA (deductible) to Roth IRA
Rol over
(non-hardship) distributions in 2019.
amount
Pre-tax savings in qualified plan to Roth IRA
included in
Converting savings attributable to after-tax (non-Roth)
Pre-tax savings in qualified plan to
taxable
contributions to a Roth IRA or designated Roth account
designated Roth account in qualified plan
income
shields future investment earnings from taxation. To
minimize taxation on earnings, some financial professionals
Would be unchanged
have recommended converting savings soon after making
Roth IRA to Roth IRA
after-tax (non-Roth) contributions.
Not taxable
Designated Roth account in qualified plan to
Proposed Changes in Reconciliation
Roth IRA
Section 138311 of H.R. 5376 would prohibit (1) all
Source: Congressional Research Service (CRS).
taxpayers from converting after-tax (non-Roth) savings in
qualified plans and nondeductible IRA funds to Roth IRAs
Notes: High-income taxpayers include single taxpayers (or those
and designated Roth accounts after December 31, 2021, and
married filing separately) with taxable income over $400,000;
(2) high-income taxpayers from converting pre-tax savings
married taxpayers filing jointly with taxable income over
in qualified plans or IRA savings attributable to deductible
$450,000; and heads of households with taxable income over
contributions to Roth IRAs or designated Roth accounts
$425,000.
after December 31, 2031. High-income taxpayers would be
defined as
For Further Information
Joint Committee on Taxation, JCX-42-21, at
single taxpayers (or those married filing separately) with https://www.jct.gov/publications/2021/jcx-42-21/
modified adjusted gross income (MAGI, as defined in
the bill) over $400,000;
CRS Report RL34397, Traditional and Roth Individual
Retirement Accounts (IRAs): A Primer
married taxpayers filing jointly with MAGI over
$450,000; and
House Committee on Rules, H.R. 5376 – Build Back Better
heads of households with MAGI over $425,000.
Act, at https://rules.house.gov/bill/117/hr-5376
These income thresholds would be adjusted for inflation.
Table 1 provides an overview of how the proposed changes
Elizabeth A. Myers, Analyst in Income Security
would affect rollovers. The Joint Committee on Taxation
IF11963
estimated that Section 138311 would increase Treasury
revenue by $749 million from FY2022 through FY2031.
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Rollovers and Conversions to Roth IRAs and Designated Roth Accounts: Proposed Changes in Budget Reconciliation
Disclaimer
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