Use It or Loose It - How Pending Tax Changes May Impact Taxpayers Part 2


On September 13, 2021 the House of Representatives’ Ways and Means Committee announced a new Tax Bill entitled, “Build Back Better” (BBB).

While the BBB has many facets which impact the economy the focus is on higher federal ordinary income taxes and capital gains (for those considered top tier earners), as well as, a reduction on federal gift and estate taxes, and an elimination of several effective estate planning techniques. In our three-part series we break down the BBB into three high level categories: 1. Federal Income Taxes, 2. Retirement Planning, and 3. Estate Planning.

Part 2: Retirement Planning

Potential Elimination of Backdoor Roth Conversion

BBB proposes to prohibit the conversion of after-tax dollars held in retirement accounts beginning in 2022.  This would effectively eliminate “backdoor ” or “mega backdoor” Roth IRAs.  A backdoor Roth conversion allows taxpayers whose Modified Adjusted Gross Income is too high to make direct contributions to a Roth IRA the ability to do so by contributing directly to a Traditional IRA and then converting those assets to the tax-friendlier Roth IRA without adverse income tax consequences.  Taxpayers who were hoping to convert dollars in tax friendlier years are likely going to have to face a choice on whether to convert now or forever hold their peace.

Potential Elimination of Roth Conversion for High Income Taxpayers

For Taxpayers over a certain threshold, Roth conversions would be altogether prohibited, but would not go into effect until 2032[1].  The threshold is based on a Taxpayers Adjusted Taxable Income (ATI)[2]. The ATI would be equal to taxable income plus (+) any deduction for contributions made to an IRA less (-) any RMDs. New thresholds are $400,000 for Single tax payers and $450,000 for Married Filing Jointly taxpayers. These amounts are cliff thresholds meaning even a dollar over would completely eliminate the ability to perform the conversion.

It is important to note, as proposed, taxpayers would have 10 years from 2022 to make the determination on whether a Roth conversion makes sense to their specific fact patterns.  Remember to always consult your Wealth Advisor and tax professionals to have such conversations in case these proposals are changed through the Legislative process.

New Required Minimum Distributions (RMDs) for High Income and Retirement Accounts over $10,000,000

The BBB proposes to create new RMDs for individuals with both high incomes and mega-sized accounts. Note, this requires both: (1) high income as defined by ATI; and (2) total retirement Accounts over $10,000,000[3].  The RMD would be required no matter the Taxpayer’s age[4] and would be enforced as follows:

  • 50% of the Total Retirement Account dollars in excess of $10MM but less than $20MM; plus
  • 100% of the Total Retirement Account dollars in excess of $20MM

As an example, consider a married couple, ages 47, with combined total retirement accounts equal to $12,000,000 and an ATI of $700,000. In this scenario the taxpayers would have an RMD of $1,000,000 as they meet both thresholds (over $450,000 ATI and over $10,000,000 in combined total retirement accounts).  The RMD is calculated as follows: $12MM - $10MM = $2MM x 50% = $1MM RMD.  As noted above, this distribution is not subject to pre-age 59 ½ distribution penalties under the new BBB rules.

Further, if subjected to the new RMD rules, while Roth IRAs are typically not subject to RMDs, BBB would require RMDs to be utilized first from Roth IRAs to satisfy the RMD requirement.  Only after those Roth accounts are depleted can a taxpayer pull from non-Roth accounts to satisfy the new RMD rules.

Next Steps

BBB proposals are subject to change through the Legislative and Democratic process.  We encourage you to reach out to your Wealth Advisor as soon as reasonable to discuss how you might be impacted by these changes and what appropriate next steps might be.  If BBB is enacted, there will be limited time – if any – to implement appropriate changes for individuals.

Continue to Part 3: Estate Planning


It should be noted from the onset that BBB is a Tax Proposal which has not been approved by the Senate nor has it been presented to President Joe Biden for approval as of publication.  All tax proposals might be subject to significant changes as the Bill is negotiated further in Congress.  The above Insight is intended to provide a high-level overview of the items which Congress is seeking to address through Tax Legislation.  Time is of the essence before new Tax Laws are enacted.  Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time. Please reach out to your Wealth Advisor to learn more information as well as seek the appropriate Tax counsel from your Attorney and/or Accountant. 

[1] BBB Bill Section 138311

[2] ATI is yet another different type of Income level to be aware of moving forward in comparison to Modified Adjusted Gross Income for the 3% Surtax and Adjusted Gross Income AGI for Ordinary Income Taxes and Capital Gains Taxes. See Part 1: Federal Income Taxes of our three-part series to learn more.

[3] BBB Bill Section 138302

[4] For Taxpayers under age 59 ½, the 10% Early Distribution Penalty will not apply under the new RMD rules.

[5] BBB Bill Section 13801 and 138302

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