For months, the future of the Backdoor Roth IRA has been one big unknown. And it’s causing all kinds of consternation across the internet forums and the WCI Facebook group. Thanks to the Build Back Better Act (BBB) legislation that was passed by the House of Representatives in November, the law, if it passes as is, would prohibit high earners from rolling over after-tax amounts from a traditional IRA into a Roth IRA and from moving after-tax amounts from a traditional 401(k) into a Roth 401(k). In fact, those with incomes over $400,000 would not be allowed to do Roth conversions at all!
That means the Backdoor Roth option and the Mega Backdoor Roth option would go extinct. The Senate hasn’t taken up the BBB yet, and it’s unclear when it will. So yes, on a very real level, the Backdoor Roth IRA is in danger of being wiped out. At this moment, it might feel like you’re in limbo.
If you’re like me, you’re asking yourself: should you complete your Backdoor Roth conversion in January 2022 before you know the outcome of the BBB? What happens if you complete it now and the BBB passes in its current form? Will you have to reclassify that rollover? Will the IRS penalize you for your foresight? Will you be grandfathered in?
Above all else, what the heck should you do right now?
Should You Do Your Backdoor Roth IRA Now?
I talked to two financial advisors to get their opinion, and both had similar ideas. Basically, if you have the cash, you should complete a Backdoor Roth conversion as soon as you can.
“You can run all these scenarios, and you’re trying to forecast this. But you don’t know what Congress is going to do,” said Ronsey Chawla, a certified financial planner at Per Sterling whose practice caters primarily to physicians and physician groups. “You go with the facts and circumstances that are at hand. What do we know for certain right now? We know that you can do it. There isn’t a blanket cookie-cutter approach. Maybe cash flow doesn’t allow you to do it. But if it’s already part of your plan, then yes, go ahead and do it until told otherwise.”
In the mind of Chad Chubb, the founder of WCI advertiser WealthKeel LLC and a CFP, multiple paths stretch out in front of his clients, mostly those in Gen X and Gen Y, who are thinking about Roth conversions.
- The BBB Act doesn't pass, and nothing happens with your Backdoor Roth conversions.
- The BBB Act is passed in 2022, and Backdoor Roth conversions are allowed. This would be the best-case option if the legislation is enacted.
- The bill is passed and Backdoor Roths are not allowed, but it’s based on the date the bill is enacted. This would be the second-best scenario since those who had already done their Backdoor conversion for 2022 would be grandfathered in.
- The new bill is passed and the Backdoor Roth is demolished, and Congress makes it retroactive to the beginning of 2022. This would be the worst-case scenario.
Though precedent exists of Congress enacting a tax law in the middle of the year and making it retroactive, it seems unlikely that would happen with the Backdoor Roth IRA. That’s because there would have to be some mechanism for allowing those who already converted a do-over and to get back their money (most likely, you’d have to fill out a new form or two).
But as Chubb said, “If the worst-case scenario is you have to send an extra form but the best-case scenario is you got a bonus year for the Roth,” then you should complete the process sooner rather than later.
Making matters even more complicated is if, like a number of Chawla’s clients, you engage in the Mega Backdoor Roth IRA where post-tax earnings are automatically moved from your traditional 401(k) into your Roth 401(k) whenever your paycheck is issued.
“Some of my clients have plans with a feature that almost instantly allows for that after-tax sum to become a Roth. It’s a trigger,” Chawla said. “The question I got posed was, ‘If Congress changes this in the middle of the year or toward the end of the year, would all of my, say, 24 transactions have to be reverted back? And who would be responsible for that: the employer, me, or the third-party administrator?’ You can see how complexity can increase in this uncertain environment.”
Here’s another way to think about a Mega Backdoor Roth, especially if the third route that Chubb laid out is the path we have to take.
I'm encouraging clients to front-load after-tax 401(k) contributions, bc the conversion to Roth is usually automatic, and contribution levels are So Much Higher. Bkdr Roth IRA contributions are nice, but they don't move the needle much for our clients, and they're much more work.
— Meg Bartelt (@MegBartelt) January 7, 2022
What Chubb wouldn’t want to see happen if the BBB passes and the Backdoor Roth conversion option disappears is to get out of the habit of putting aside that extra $6,000 per year ($7,000 for 50-plus) for retirement, like you normally would with a Roth IRA.
“It’s like the definition of personal finance,” Chubb said. “You’re doing these little things and it doesn’t feel like much now. But it’s going to be really valuable decades from now. It’s so agile—early in life and later in life. If we can start with our docs in their early 30s or even in their 40s, that $6,000 a year might not be the largest number in their lives. But decades later, it really becomes special, when you can say, ‘Remember all those $6,000 contributions? Look at how much tax-free money you have now.’”
Dr. Jim Dahle also wrote about the issue in the most recent WCI newsletter (if you’re not getting the monthly newsletters, you can rectify that here). Here’s what he wrote:
“The bottom line is that as of now, you can still legally do a 2022 Backdoor Roth, a 2022 Mega Backdoor Roth, and any Roth conversion you please no matter what your income, just like you have been able to do for the last 12 years. The big question that most of you seem to have, however, is whether Congress will change the law to retroactively disallow a Backdoor (or Mega Backdoor) Roth IRA done in early 2022. I give it as MY OPINION that this will not happen for three reasons:
- I think it's unlikely Congress passes the law at all
- Passing retroactive laws is inherently unfair (although not unheard of)
- There is no current mechanism to reverse the conversion step of a Backdoor or Mega Backdoor Roth IRA
Thus, if Congress decided to make these retroactively illegal, they would also have to prepare a process for them to be undone. That seems very unlikely to me, but I will promise you this—if it happens, I will write a blog post that walks you through reversing them step by step and we can do it together. In the meantime, I suggest you do your Backdoor Roth IRA and Mega Backdoor Roth IRA processes as early in the year as you can afford to do so. We will be doing ours the first week of January. If you still have not done a 2021 Backdoor Roth IRA for yourself and your spouse, I suggest you also do that ASAP.”
The answer to the original question then is simple. Should you do your Backdoor Roth IRA conversion as early in 2022 as you can and continue on with the Mega Backdoor Roth conversion if you have the ability? The answer: do it until you’re told you can’t do it anymore.
How Many Times Can You Do a Backdoor Roth?
The Backdoor Roth can be utilized once per tax year. But the deadline to fund the Backdoor Roth IRA isn't actually until Tax Day of the following year. If you wanted to fund your Backdoor Roth for the year 2021, you'd have until April 18, 2022, to accomplish that. If you wanted to fund the Backdoor Roth for 2022, you'd have until April 18, 2023. Of course, you could do a Backdoor Roth on April 18, 2022, for the 2021 year and then you could do a Backdoor Roth on April 19, 2022, for the 2022 year.
As long as Congress doesn't many any changes, you can continue doing the Backdoor Roth as many years into the future as you'd like. But remember, if your income falls below $144,000 for an individual or $214,000 for married filing jointly, you don't need to go the backdoor route. At that point, you can just directly contribute to your Roth IRA.
What I’m Reading This Week
Burnout: It’s for Women and Men
After months of behind-the-scenes work, WCI has officially introduced its Burnout Proof MD program that will hopefully help those white coats who are suffering with their mental well-being. It should be a fantastic program, in conjunction with physician coach Dr. Dike Drummond, and hopefully, it will assist all kinds of medical workers.
Having said that, the New York Times had an interesting piece recently on how men burn out. As the newspaper writes:
“According to a national study published in 2019, women physicians were at 32% greater risk of burnout than their male colleagues. That disparity is a problem, but in a profession where the burnout rate is 44%, there are still hundreds of thousands of male doctors suffering and potentially putting patients in danger.
If we want to end burnout, we have to address the problem for men as well as women. And to address men’s burnout in particular, we have to acknowledge that consciously or not, our society still largely equates masculinity with being a stoical wage earner. Not all men view themselves this way, and even men who don’t are still susceptible to burnout. But research shows that men and women tend to undergo burnout differently. The signature patterns in male burnout each reflect an enduring breadwinner ethos that does not serve men well.”
Making matters worse is that men are less likely to open up to others about their burnout, and according to the Times, they’re about 40% less likely to seek counseling, meaning “single men often have no one at all; when they burn out, they may do so alone.”
Courtney Love on the Millions She Lost
Since I feel compelled to bring you every article I can find that combines heavy metal/grunge/hard rock/punk/ska music with financial matters—Mötley Crüe’s Tommy Lee and Iron Maiden have already taught us such good lessons about saving and the scourge of subprime mortgage lenders—Courtney Love has an interesting first-person account in the Financial Times. The lead singer of the 1990s grunge band Hole and the widow of Nirvana frontman Kurt Cobain, Love writes about how much money has been lost.
Her lede is awfully compelling:
“My family has been the victim of every single financial crime there is. . . . We’ve had millions taken from us. It started a few years before Kurt [Cobain]’s death, in the early 1990s, and only got worse after he died. Recently my manager and an attorney discovered five forged wills of mine, 67 bank accounts, 102 Mastercards and Visas. There were Centurion cards with million-dollar credit lines—I found one that was being used in 2005 by someone I had fired in 1999! Basically, they stole every single cent.”
It's a fascinating (and heartbreaking) read from a woman who has already suffered so much pain but who is also trying to become financially literate.
Doctors’ Jobs Are Only Getting Harder, and They’re Appreciated by Less
Nearly two years into the pandemic, doctors and nurses are being attacked—physically and emotionally. As one Dallas emergency room physician said, via Poynter:
“A year ago, we’re health care heroes and everybody’s clapping for us,” said Dr. Stu Coffman. “And now we’re being in some areas harassed and disbelieved and ridiculed for what we’re trying to do, which is just depressing and frustrating.”
Please be careful out there.
Money Song of the Week
Whenever I listen to “Pleasant Valley Sunday” by the Monkees, I always turn nostalgic and think about my youth, when I’d watch old reruns of the TV show on Nickelodeon in the 1980s and think about how cool and goofy Micky Dolenz and the rest of the gang were. As we bid a fond farewell to Michael Nesmith, one of the main engines of the 1960s pop phenomenon who died about a month ago, let’s take another listen to one of the band’s most popular singles and break down what it meant from a financial aspect.
It’s such a pleasant, chill song with an infectious bass groove (that, despite what the video above shows, wasn’t actually played by Davy Jones) and some nice harmonies on the chorus. But the lyrics aren’t as upbeat as the tone of the music would suggest. It's really all about suburbia and how having more money doesn't necessarily make for a more satisfying life.
The tune was originally co-authored by songwriting superstar Carole King who, according to Dolenz in an interview with ABC.net, took inspiration from a West Orange, New Jersey street called Pleasant Valley Way. King’s writing partner and then-husband, Gerry Goffin, apparently disliked the suburban aspects of that particular area, where they happened to be living, and he wrote about his displeasure with the upper-middle class who could afford to flee the big cities and live with like-minded people who would mow their lawns on the weekends and who could afford to have a TV in every room.
As you can probably tell with lyrics like, “Another Pleasant Valley Sunday/Charcoal burnin' everywhere/Rows of houses that are all the same/And no one seems to care” and “Another Pleasant Valley Sunday/Here in status symbol land/Mothers complain about how hard life is/And the kids just don't understand/Creature comfort goals they only numb my soul/And make it hard for me to see/My thoughts all seem to stray to places far away/I need a change of scenery.”
Despite the Monkees’ reputation as pre-made bubblegum pop who didn’t play their own instruments or create their own songs, Nesmith was determined in the late 1960s to seize control of the group’s music from its record company. For many years, the Monkees were kind of a joke, or at least thought of as a made-for-TV group that didn’t have real musical talent. Thanks to Nesmith’s efforts and songs like “Pleasant Valley Sunday,” that reputation didn’t last.
Tweet(s) of the Week
Oh jeez, I could watch this guy’s blank stare for hours.
Long time crypto holders RN pic.twitter.com/21qTmnjdkW
— st0nks&b0ngz #iamIATSE💎🤲 (@st0nksNb0ngz) January 6, 2022
Yes, I know I work here, but this seems to be pretty good advice.
It would be a lot easier to figure out risk tolerance if it was static. Rest assured your risk tolerance will be lower in a bear market than it is right now. Set your asset allocation accordingly. You generally want the most aggressive AA you can handle in a terrible bear market.
— White Coat Investor (@WCInvestor) January 5, 2022
Have you already done a Backdoor Roth conversion in 2022? Did you get any advice beforehand? Are you nervous about what Congress will do? Comment below!
[Editor's Note: Josh Katzowitz is the Content Director for The White Coat Investor, and his work has appeared in the New York Times, Wall Street Journal, Washington Post, Los Angeles Times, and CBSSports.com. A longtime sports writer, he covers boxing for Forbes, and his work has been cited twice in the Best American Sports Writing book series. For comments, complaints, suggestions, or plaudits, email him at [email protected]]