The government is trying to incentivize people to save for retirement and it willing to forgo some tax revenue in order to do that. But on the other side, they don’t want to give up too much tax revenue, especially to people that can afford to pay taxes.
So where is that balance? About $184,000 I’d guess, at least according to Congress and the IRS. Could have been $150k or $250k but you gotta pick something. There are somewhat random lines drawn in life every where, all over the place. Why is the speed limit 65 not 67 or 63.5837? Why is the sales tax 5.5% not 5.4%? Who invented liquid soap and why?
I don’t know who is overthinking it. It’s fairly simply arbitrary, but in a less coherent way than just ‘have a draw a line somewhere’. Again, given that Trad IRA’s do not have an income limit, nor do company or individual 401k’s. They have contribution limits only. And again even the ‘have to draw a line somewhere’ income limit on Roth’s is pretty meaningless as long as you are allowed to convert Traditional IRA’s to Roths without any income limit.
It’s emblematic of a tax code with too much complication. And that has real world effects in dulling the incentives the writers intend, besides the economic deadweight of researching and/or hiring professionals to interpret something which really doesn’t have to be that complicated (though I’m not presenting the chimera of ‘everyone can do their taxes on a postcard’ which isn’t necessarily practical either under a system with basic features which can gain a political consensus).
But that’s same/same isn’t it? If you have contribution limits, or income limits, you are still, well, limited in the amount of taxes you can avoid right? The government isn’t giving your carte blanch to avoid paying all of your taxes. They are limiting you one way or the other. One way via contributions and one way via income.
Say there weren’t limits on a Roth. I’d bet you dollars to donuts that there would be a thread here asking why Trump can get a tax break on a Roth when he’s worth millions.
You’re referring to the back door Roth of course. It’s my understanding (and I’m willing to be proven wrong) that the back door Roth wasn’t intended to be used that way, and that’s it’s an unintended consequence of another issue. There has been talk of closing this loophole, but they never seem to. Even so, it’s not just all that simple to use a back door Roth. You have to consider all of your other traditional IRAs as well.
Of all the tax code issues, this doesn’t seem to be at the top of the list. And if you’re just venting, they fire away!!!
But what’s all that complicated about this? You make a certain amount your can’t shield your earnings via a Roth. It’s not rocket science.
And you can be sure that the writers of the legislation wrote the income limit requirement, and the (at least initial) monetary limit.
If you make close to $200,000, you’re either smart enough to do your own taxes or make enough to pay someone to do it. I don’t qualify for a Roth anymore, but when I did, I used turbotax, took me a couple of hours and cost $50. Not the most arduous thing I have to do as a citizen.
So if you actually google Back Door Roth IRA, you realize that this limit is totally meaningless. People above the income limit can perfectly legally, and with basically no fees, get the same amount of money into a Roth IRA as a person under the limit.
Not totally meaningless. People over the age of 70 1/2 cannot use the backdoor Roth IRA contribution method, because they are not allowed to make Traditional IRA contributions. So it locks out the elderly fatcats.
And because of the pro-rata rules for distributions from Traditional IRAs, if they have before-tax balances in their IRAs, they cannot do the conversion from Traditional to Roth tax-free. What I see a lot is people who leave their jobs, roll their 401(k) balances into a IRA, and then the next year want to make a back door Roth contribution. Much to their surprise, they can’t do what they’ve been reading about on the internet. Or, at least, can’t do it tax-free.
But you’re just ignoring the point. Which is that there’s no logic to Roths having an income limit but Trad IRA’s and 401k’s not having one. Ie there would be no logical reason to complain if someone like Trump could make a (direct) Roth limited contribution of already taxed income (which he can’t) when under existing law he can make the same limited contribution to a Trad IRA or 401k as anyone else.
This in IMO is an insidious attitude, that tax complications, contradictions and inefficiencies are justified because ‘it usually applies to people who make a lot, and that’s their problem if they make a lot’. I see that as distinct from a philosophical position that taxes should be progressive (to whatever degree). People don’t have to agree on the specifics of that to respect an opposing position of different degree. I see ‘it’s OK if it’s arbitrary, inefficient and contradictory as long as it just creates a make-work industry some people have to employ’ as a categorically invalid POV.
Again returning to the point, which is not a question of there being any limits to retirement tax breaks, it’s the lack of any logical defense of the difference between Roth’s having an income limit and Trad IRA/401k (and various other retirement savings breaks) not having one. Nor does it have to be ‘the top item’ to be emblematic of a system in serious need of a thorough overhaul. For real, no ‘venting’.
It used to be that there was an income limit on doing conversions from a Traditional to a Roth IRA. Congress was struggling with a new tax bill in 2005 (“Tax Increase Prevention and Reconciliation Act of 2005” or “TIPRA”) and wanted to make a show of balancing the budget, so they need to raise money to offset the tax cuts.
They figured that if they removed the income limit on Roth IRA conversions, all the rich people who had been stashing money in their Traditional IRAs would rush to convert them to Roth IRAs. Since most of the contributions and all of the earnings were before-tax, they would have to pay taxes on the conversions. This would bring in enough money to theoretically balance the budget. Of course, they ignored the fact that this would reduce future revenues, since the budget-planning horizon is only ten years and they were not concerned with the budget impact after ten years.
But in doing so, they inadvertently opened up a loophole which financial advisers seized upon almost immediately. And thus was born the Back Door Roth IRA contribution.
And for more fun and games, if you are lucky enough to work for a company that has a 401(k) plan with all the options allowed by law, you have another option to shelter even more money from taxes: the Mega Back Door Roth contribution.
Wait. You’d really argue that there isn’t a limit on a traditional IRA? You’d state that in a substantive way, there isn’t a limit on a traditional IRA?
Because is practice, it seems clear to me that there is.
I’ve been trying to educate myself on this subject lately, and Corry El is right. I was surprised to find that there is no INCOME limit regarding contributing to a traditional IRA.
Here’s a link to Motley Fool’s article on the subject for 2016 and 2017, and here’s the relevant sentence:
"Traditional IRA income limits
The ability to contribute to a traditional IRA isn’t restricted by income. You can contribute as much as you want, up to the IRS’s annual maximum, regardless of how much money you earn."
I’m trying to decide if doing a backdoor Roth conversion is a wise thing for me to do. I know it has to do with your tax rate now versus after you retire, but I haven’t a clue how I can predict my tax rate ten years from now.
Also, if I contribute to a traditional IRA right now, it would be with after-tax dollars. If I converted that into a Roth, I don’t understand why I would pay tax on the conversion now. I’ve already been taxed on it once.
It’s a crap shoot. A lot of people say that “of course I’ll be in a lower tax bracket when I retire” but that’s not certain, especially when you’ve been a diligent saver all your life. With a Traditional IRA (TIRA), you have the mandatory distributions starting at age 70 1/2 that will boost your income. Also remember that your Medicare Part B fees are based on your income. Distributions from a TIRA boost your income (and hence your Part B premiums), distributions from a Roth do not.
Also, the percentage of your Social Security payments that is taxable depends on your AGI. TIRA distributions boost your AGI, Roth distributions do not.
Contributions to a Roth IRA are ALWAYS better than after-tax contributions to a TIRA. No exceptions. The only reason to make after-tax contributions to a TIRA is if you either are planning a Back Door Roth conversion or if you are ineligible for a direct contribution to a Roth and you have a large before-tax balance in your TIRAs.
If you make an after-tax (non-deductible) contribution to a TIRA, then the conversion is not taxable if you don’t have any before-tax balances in any of your TIRA accounts. For purposes of a conversion, all of your TIRA accounts (but not your 401(k) accounts) are treated as one big TIRA account. The amount converted is deemed to have come proportionally from your before-tax and after-tax balances. The conversion of the after-tax balances is tax-free. This is why people recommend do a back door Roth contribution only if you have little or no before-tax balances in your TIRAs.
