This limits the amount of time the funds have to grow, and if there are no earnings on the contribution, the funds being rolled over will avoid taxes.
The backdoor technique allows high-income folks to sidestep the IRS’s modified adjusted gross income limits for contributing to a Roth IRA, which for single filers is under $144,000 for 2022. If you're married and file jointly, your MAGI must be under $214,000 for 2022, to contribute to a Roth.
In Secure 1.0, lawmakers did away with another tax-advantaged estate vehicle—stretch IRAs—that allowed investors to pass on their IRA assets to heirs, who often then had their entire lifetimes to draw down the assets tax-free.
In February, the IRS issued more than 750 pages of regulations required by Secure 1.0, creating numerous categories of beneficiaries who now must draw down inherited assets within a 10-year period. The added twist is that now many beneficiaries must also begin taking required minimum distributions in years one through nine.
Since Roths were excluded by the IRS from that last requirement of years one through nine required drawdowns, the assets can grow tax-free for the entire 10 years.
All of these changes make backdoor Roths that much more desirable, Slott said at the conference.
“You won’t have required minimum distributions even if a Roth owner dies well past his required RMD date. That’s because the IRS specified that any Roth owner who dies is deemed to have died before their required beginning date, no matter what age they were,” Slott said.
“They don’t have to touch the assets until the 10th year,” he added.
Slott said sharing all this information with clients can add tremendous value to advisors’ worth. “Qualified Roth distributions means there are no tax or penalties on the way out. You should be telling clients to just get them open for children and grandchildren to get that five-year clock started,” Slott said.
Slott was referring to the IRS rule that allows Roth contributions to be withdrawn tax- and penalty-free after five years.
The prospect of Congress raising tax rates in the future makes Roths even more valuable, the CPA added. “Who knows how long rates can stay this low? Because of deficit levels, Congress may have to increase taxes. Investors should take advantage of this now,” he said.