Harry Sit's Blog, page 22

2021 2022 2023 Federal Poverty Levels (FPL) For ACA Health Insurance

People who don’t have health insurance from work can buy health coverage under the Affordable Care Act (ACA), also known as Obamacare. The premiums are made affordable by a premium subsidy in the form of a tax credit calculated off of your income relative to the Federal Poverty Levels (FPL), also known as the HHS poverty guidelines.

The Maximum Income

Except for 2021 and 2022, you qualify for the premium subsidy only if your modified adjusted gross income (MAGI) is at 400% FPL or below. If your MAGI goes above 400% FPL even by $1, you lose all the subsidy. See Stay Off the ACA Premium Subsidy Cliff.

The American Rescue Act made a temporary change for 2021 and 2022. It turned the cliff into a gradual slope. You still qualify for a premium subsidy in 2021 and 2022 even if your income is over 400% FPL. You just qualify for a lower amount as your income goes up. See ACA Premium Subsidy Cliff Turns Into a Slope In 2021 and 2022. The cliff is scheduled to return in 2023.

Modified Adjusted Gross Income for the ACA premium subsidy is basically your adjusted gross income (AGI) plus tax-exempt muni bond interest, plus untaxed Social Security benefits. In order to see how much you qualify for the premium subsidy, you have to know where the FPL is.

The Minimum Income

In addition to the maximum income to receive the premium subsidy, there’s also a minimum income to get accepted by the ACA marketplace. If your estimated income is too low, the ACA marketplace won’t accept you. They send you to Medicaid instead. In states that expanded Medicaid, the minimum income is 138% FPL. In states that didn’t expand Medicaid, the minimum income is 100% FPL. Here’s a map from Kaiser Family Foundation that shows which states expanded Medicaid and which states did not: Current Status of State Medicaid Expansion Decisions.

However, unlike the maximum income, the minimum income is only examined at the time of enrollment, not at the time when you file your tax return. If your estimated income at the time of enrollment is below the minimum, the ACA marketplace won’t accept you, and they will refer you to Medicaid. If your estimated income at the time of enrollment is above the minimum and they accepted you, but due to unforeseen circumstances your income for the year ended up below the minimum, as long as you made the original estimate in good faith, you are not required to pay back the premium subsidy you already received.

The FPL Numbers

Here are the numbers for coverage in 2021, 2022, and 2023. They increase with inflation every year in January. These are applied with a one-year lag. Your eligibility for a premium subsidy for 2022 is based on the FPL numbers announced in 2021. The new numbers announced in 2022 will be used for coverage in 2023.

There are three sets of numbers. FPLs are higher in Alaska and Hawaii than in the lower 48 states and Washington DC.

48 Contiguous States and Washington DCNumber of persons in household2021 coverage2022 coverage2023 coverage1$12,760$12,880$13,5902$17,240$17,420$18,3103$21,720$21,960$23,0304$26,200$26,500$27,7505$30,680$31,040$32,4706$35,160$35,580$37,1907$39,640$40,120$41,9108$44,120$44,660$46,630moreadd $4,480 eachadd $4,540 eachadd $4,720 eachAlaskaNumber of persons in household2021 coverage2022 coverage2023 coverage1$15,950$16,090$16,9902$21,550$21,770$22,8903$27,150$27,450$28,7904$32,750$33,130$34,6905$38,350$38,810$40,5906$43,950$44,490$46,4907$49,550$50,170$52,3908$55,150$55,850$58,290moreadd $5,600 eachadd $5,680 eachadd $5,900 eachHawaiiNumber of persons in household2021 coverage2022 coverage2023 coverage1$14,680$14,820$15,6302$19,830$20,040$21,0603$24,980$25,260$26,4904$30,130$30,480$31,9205$35,280$35,700$37,3506$40,430$40,920$42,7807$45,580$46,140$48,2108$50,730$51,360$53,640moreadd $5,150 eachadd $5,220 eachadd $5,430 each

Source:

Department of Health and Human Services, notice 2020-00858Department of Health and Human Services, notice 2021-01969Department of Health and Human Services, notice 2022-01166The Applicable Percentages

The FPL numbers determine one aspect of your eligibility for the premium subsidy. How much you are expected to pay when you qualify for the premium subsidy is also determined by a sliding scale called the Applicable Percentages. We cover it in ACA Health Insurance Premium Tax Credit Percentages.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post 2021 2022 2023 Federal Poverty Levels (FPL) For ACA Health Insurance appeared first on The Finance Buff.

How to Report 2021 Backdoor Roth In FreeTaxUSA (Updated)

TaxAct used to be a low-cost alternative to the big two tax prep software TurboTax and H&R Block. However, its pricing strategy changed in recent years. Now TaxAct is just as expensive or sometimes even more expensive than TurboTax and H&R Block. The good news is another low-cost alternative emerged. It’s called FreeTaxUSA.

FreeTaxUSA is purely online; there is no download option. It uses the freemium pricing model. Federal tax filing is free, regardless of the complexity of the return. After you are done with federal, if you need to file a state return, it costs $12.95. They also offer a deluxe upgrade for $6.99, which includes audit assist, priority support, and amended returns. All told, the total cost is under $20 and it includes e-filing for both federal and state.

Low cost is good and all, but how good is the software? I decided to test-drive it with a slightly complicated subject: reporting the Backdoor Roth. Over the years I created guides for how to report Backdoor Roth in TurboTax and how to report Backdoor Roth in H&R Block. A reader asked me to also create a guide for doing the same in FreeTaxUSA.

Just as a refresher, a Backdoor Roth involves making a non-deductible contribution to a Traditional IRA followed by converting from the Traditional IRA to a Roth IRA. Both the contribution and the conversion need to be reported in the tax software. For more information on Backdoor Roth, see Backdoor Roth: A Complete How-To.

Table of ContentsWhat To ReportConvert From Traditional IRA to RothTraditional IRA ContributionTaxable Income from Backdoor RothTroubleshootingWhat To Report

You report on the tax return your contribution to a Traditional IRA *for* that year and your converting to Roth *during* that year.

For example, when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it during year X or between January 1 and April 15 of the following year. You also report your converting to Roth *during* year X, whether the contribution was made for year X, the year before, or any previous years. Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.

You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finish your conversion in the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately. Don’t wait until the following year to contribute for the previous year.  Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat.

If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.

Here’s the scenario we’ll use as an example:

You contributed $6,000 to a traditional IRA in 2021 for 2021. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2021, the value grew to $6,200. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.

If your scenario is different, you will have to make some adjustments to the screens shown here. Some of the screenshots were from the previous year. The screens are still the same in the 2021 edition.

Before we start, suppose this is what FreeTaxUSA shows:

We’ll compare the results after we enter the Backdoor Roth.

Convert From Traditional IRA to Roth

The tax software works on income items first. Even though the conversion happened after the contribution, we enter the conversion first.

When you convert from Traditional IRA to Roth, you will receive a 1099-R. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only converted during the following year and you don’t have a 1099-R yet, skip to the next section “Traditional IRA Contribution.” You’ll complete this section next year.

In our example, by the time you converted, the money in the Traditional IRA had grown from $6,000 to $6,200.

Click on Yes when it asks you about the 1099-R.

It’s just a regular 1099-R.

Enter the 1099-R exactly as you have it. Pay attention to the code in Box 7 and the checkboxes. It’s normal to have the same amount as the taxable amount in Box 2a, when Box 2b is checked saying “taxable amount not determined.”  Pay attention to the distribution code in Box 7. My 1099-R has code 2, and the IRA/SEP/SIMPLE box is also checked.

Right after you enter the 1099-R, you will see the refund number drop. Here we went from a $1,540 refund to $264. Don’t panic. It’s normal and temporary. The refund number will come up when we finish everything.

It asks you about Roth conversion. Answer Yes to conversion and enter the converted amount. This whole 1099-R is the result of a Roth conversion.

You are done with this 1099-R. Repeat if you have another 1099-R. If you’re married and both of you did a Backdoor Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse.

It asks you about the basis carried over from previous years. If you did a clean “planned” backdoor Roth every year, although technically the answer is Yes, you have nothing to carry over from year to year. In our simple example, we don’t have any. If you do, get the number from line 14 of Form 8606 from your previous year’s tax return.

Not impacted by a disaster.

Now continue with all other income items until you are done with income. Your refund meter is still lower than it should be, but it will change soon.

Traditional IRA Contribution

Find the IRA Contributions section under the “Deductions / Credits” menu.

Answer Yes to the first question and enter your contribution. Leave the answer to “Did you recharacterize” at No. In our example, you contributed $6,000 directly to a Traditional IRA. If you originally contributed to a Roth IRA and then you recharacterized the contribution as traditional contributions, enter the amount in the Roth IRA box and choose Yes below when it asks you whether you recharacterized.

Your refund number goes up again! It was a refund of $1,540 before we started. It went down a lot and now it’s back to $1,496. The $44 difference is due to paying tax on the $200 earnings before we converted to Roth.

We don’t have a SEP or SIMPLE account.

Withdrawal means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer ‘No’ here.

In our example, we don’t have any basis carried over from the previous years. We don’t have any money in traditional, SEP, or SIMPLE IRAs as of the end of the year (we already converted to Roth by then). Our contribution was made during the year in question, not in the following year.

It tells us we don’t get a deduction. We know. It’s because our income was too high. That’s why we did the Backdoor Roth to begin with.

If you only contributed *for* last year but you didn’t convert until the following year, remember to come back next year to finish the conversion part.

Taxable Income from Backdoor Roth

After going through all these, let’s confirm how you’re taxed on the Backdoor Roth. Click on “View 1040” on the right-hand side.

Look for Line 4 in Form 1040.

It shows $6,200 in IRA distributions and only $200 is taxable. If you are married filing jointly and both of you did a backdoor Roth, the numbers here will show double.

Tah-Dah! You got money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. You will pay tax on a small amount in earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

W-2 Box 13

Make sure the “Retirement plan” box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.

When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.

Self vs Spouse

If you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post How to Report 2021 Backdoor Roth In FreeTaxUSA (Updated) appeared first on The Finance Buff.

Taxes on I Bonds Get Complicated If You Go Against the Default

Taxes on I Bonds are dead simple if you don’t do anything extra. You make it a lot more complicated when you go against the default.

Table of ContentsThe Default – During Your LifetimeThe Default – After You DieOptional – Pay Up In the Year of DeathOptional – Report Interest Every YearNo Annual 1099 No Periodic StatementsValue on December 31 or January 1?Unrealized Early Withdrawal PenaltyBond-by-Bond Tracking RequiredRisk of Paying Tax TwiceSavings Bond CalculatorThe Default – During Your Lifetime

By default, you don’t pay any taxes while you’re holding I Bonds during your lifetime. You pay federal income tax on the interest accumulated over the years only when you cash out or when the bonds mature after 30 years. It’ll be taxed as ordinary income, not long-term capital gains. The interest is exempt from state and local taxes. There’s no RMD in I Bonds.

If you do a partial cashout from a purchase, TreasuryDirect will split the cashed-out amount proportionately into principal and interest. Suppose you originally bought $10,000 and the $10,000 grew to $15,000 with interest. When you cash out $3,000 from this purchase, which is 20% of the total value, TreasuryDirect will split it into $2,000 principal and $1,000 interest. You’ll pay tax on $1,000.

TreasuryDirect will track and calculate the interest for you. They’ll generate a 1099-INT form for the year when you cash out any I Bonds or when any I Bonds mature. You log in to your account and download the 1099 form.

The Default – After You Die

The second owner or beneficiary on your I Bonds inherits those bonds after you die. Be sure to keep your second owner or beneficiary designations up to date. See How to Add a Joint Owner or Change Beneficiary on I Bonds.

By default, your second owner or beneficiary doesn’t pay any taxes when they continue to hold those I Bonds they inherit from you. I Bonds aren’t eligible for a step-up in basis. They’ll pay federal income tax on the accumulated interest since your original purchase when they cash out or when the bonds mature. It’ll be taxed as ordinary income, not long-term capital gains. The interest is exempt from state and local taxes. TreasuryDirect will track and calculate the interest and generate the 1099-INT form for the new owner.

This is the easiest.

Optional – Pay Up In the Year of Death

After you die, your surviving spouse or whoever files your final year’s tax return can choose to include all the accumulated interest earned through your date of death on your final tax return. Then the second owner or the beneficiary will pay tax only on the interest earned going forward.

Your surviving spouse or the executor of your estate will need to do the calculation themselves if they choose this option. TreasuryDirect won’t generate any 1099 form unless they cash out your I Bonds.

Your second owner or beneficiary needs to keep the documentation to show how much interest was already added to your final tax return for the bonds they inherited. When they cash out the bonds or when the bonds mature, the 1099 form from TreasuryDirect will still show all the interest since your original purchase. They’ll have to remember to back out the interest that was already included on your final tax return. See IRS Publication 559 (page 11).

Because it can be many years until they cash out the bonds or when the bonds mature, it’s quite possible they’ll forget and they’ll pay tax again on the whole thing when they have a 1099 form in front of them. I think it’s better to just go with the default and not go out of the way to pay up in the year of your death.

Optional – Report Interest Every Year

Reader Jeff left this comment on my How to Buy I Bonds post:

Your comment on taxation is a bit misleading. Yes, you can wait until maturity to declare the interest in you income. However, you do have the option of declaring the interest annually on your tax return. In some cases that can be better, especially for younger buyers who don’t have much (or any) taxable income to report.

I admit I left that part out of the scope of the introduction to I Bonds because it’s more of an advanced tactic. Let’s go into it now.

IRS Publication 550 says this on page 7:

Method 2. Choose to report the increase in redemption value as interest each year.

You must use the same method for all Series EE, Series E, and Series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.

Method 1 is the default we talked about already — you wait until you cash out or until the bonds mature. Method 2 is appealing when you’re in a low tax bracket. You avoid having all the accumulated interest come as income in one year when you cash out or when the bonds mature. As Jeff mentioned, this is especially true when I Bonds are owned by a child, whose standard deduction and low tax brackets may otherwise go unused each year.

This optional Method 2 is doable in theory but it brings a lot of complications in real life.

No Annual 1099

You don’t get much help if you choose Method 2. It’s not like you can change a setting in your TreasuryDirect account and you’ll start receiving 1099 forms each year. TreasuryDirect will always assume you’re going with the default. You’ll have to figure out on your own how much interest to report each year.

No Periodic Statements

You see the current values of your I Bonds when you log in to your TreasuryDirect account. TreasuryDirect doesn’t produce any monthly or annual statements showing you the historical values and how much interest you earned during any month or year. When you’re doing taxes in March, it’s a small challenge just to figure out what the values were as of the beginning of this year or the end of last year.

Value on December 31 or January 1?

The IRS publication only says to report “the increase in redemption value” but it doesn’t say between which dates. Is it from January 1 to December 31? Or is it from December 31 of the prior year to December 31? Or is it from January 1 to January 1 of the following year?

The values on December 31 and January 1 are the same in most other financial instruments because January 1 is always a holiday. That’s not the case for I Bonds. I Bonds get the interest from the previous month on the first of each month. The redemption value on January 1 includes interest from December whereas the redemption value on December 31 does not.

If you count the increase using the values from January 1 to December 31 each year, you only include interest from 11 months. That can’t be right.

When it comes to taxes, the cutoff is usually December 31. If you use December 31 to December 31, you include interest from December of the prior year through November. That’s odd, but maybe that’s how they want it?

If you use January 1 to January 1, you include interest from January to December, but are you supposed to use January 1 of the following year as the valuation date?

After further research, reader Steven figured out that you should calculate “the increase in redemption value” using values on December 31 each year to report as interest on your tax return. See comment #7 under this post.

Unrealized Early Withdrawal Penalty

The redemption values you see in TreasuryDirect automatically exclude the potential three-month early withdrawal penalty when the bonds are within their first five years. It’s not clear whether “the increase in redemption value” is before this unrealized early withdrawal penalty or after.

When you have a bank CD, the interest is first paid, which you pay tax on, and you deduct the early withdrawal penalty if you withdraw early. If you use the redemption values of your I Bonds as shown by TreasuryDirect, you will have the early withdrawal penalty pre-deducted whether you actually withdraw early or not. You will have three fewer months of interest in the first year and 15 months of interest in the sixth year (instead of the normal 12 months). Again, that’s odd but maybe that’s how they want it?

Further research from Steven showed you should use the values on December 31 each year as reported by TreasuryDirect, with any early withdrawal penalty pre-deducted.

Bond-by-Bond Tracking Required

When you report interest annually, you make one entry on your tax return for all the I Bonds you own. When you finally cash out one of them, TreasuryDirect still assumes you’re going with the default and the 1099 form will include all the accumulated interest. You’ll need to back out all the interest you reported in previous years for that one bond you cashed out.

If you only rely on previous tax returns, (a) you’ll need to go back many years; and (b) getting the total for all bonds from previous tax returns isn’t enough. You’ll need the details bond by bond. If you only cash out part of a bond, you need to make further adjustments and also account for previous partial cashouts of the same bond.

If you use a tax preparer and you want them to track and report the interest every year, the extra cost required for this bond-by-bond tracking can easily overwhelm any tax savings from using the optional reporting method.

Risk of Paying Tax Twice

If you have been reporting interest every year and now someone else has to do your taxes for whatever reason, they may not know what was done before. It’s very easy to pay tax again when they have a 1099 form in front of them because that’s the default.

Savings Bond Calculator

If you really really want to take on reporting interest annually, it’s helpful to use the Savings Bond Calculator from TreasuryDirect. The calculator shows you the redemption value of an I Bond as of a given date.

The stand-alone calculator isn’t integrated into your TreasuryDirect account. Please read the instructions for how to save a list of bonds you own. Use Firefox or Safari when you save your list. It doesn’t work with Chrome or Microsoft Edge. You’ll have to update the list manually as you acquire new bonds and cash out old bonds.

Build and maintain a spreadsheet. Calculate the increase in redemption values using December-to-December values without any adjustment for the unrealized early withdrawal penalty during the first five years. Update the values in your spreadsheet with the values from the Savings Bond Calculator. Save screenshots of the Savings Bond Calculator as your documentation if necessary.

***

Now you know why I left out the optional tax reporting method from the How to Buy I Bonds post. It’s much more complicated in real life than just that one sentence in the IRS publication. I’m not sure the juice is worth the squeeze. I happily go along with the default for my I Bonds.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Taxes on I Bonds Get Complicated If You Go Against the Default appeared first on The Finance Buff.

Taxes on I Bonds Are Complicated If You Go Against the Default

Taxes on I Bonds are dead simple if you don’t do anything extra. You make it a lot more complicated when you go against the default.

Table of ContentsThe Default – During Your LifetimeThe Default – After You DieOptional – Pay Up In the Year of DeathOptional – Report Interest Every YearNo Annual 1099 No Periodic StatementsValue on December 31 or January 1?Unrealized Early Withdrawal PenaltyBond-by-Bond Tracking RequiredRisk of Paying Tax TwiceSavings Bond CalculatorThe Default – During Your Lifetime

By default, you don’t pay any taxes while you’re holding I Bonds during your lifetime. You pay federal income tax on the interest accumulated over the years only when you cash out or when the bonds mature after 30 years. The interest is exempt from state and local taxes. There’s no RMD in I Bonds.

If you do a partial cashout from a purchase, the cashed-out amount will be split proportionately into principal and interest. Suppose you originally bought $10,000 and the $10,000 grew to $15,000 with interest. When you cash out $3,000 from this purchase, which is 20% of the total value, it will be split into $2,000 principal and $1,000 interest. You’ll pay tax on $1,000.

TreasuryDirect will track and calculate the interest for you. They’ll generate a 1099-INT form for the year when you cash out any I Bonds or when any I Bonds mature. You log in to your account and download the 1099 form.

The Default – After You Die

The second owner or beneficiary on your I Bonds inherits those bonds after you die. Be sure to keep your second owner or beneficiary designations up to date. See How to Add a Joint Owner or Change Beneficiary on I Bonds.

By default, your second owner or beneficiary doesn’t pay any taxes when they continue to hold those I Bonds they inherit from you. I Bonds aren’t eligible for a step-up in basis. They’ll pay federal income tax on the accumulated interest since your original purchase when they cash out or when the bonds mature. The interest is exempt from state and local taxes. TreasuryDirect will track and calculate the interest and generate the 1099 form for the new owner.

This is the easiest.

Optional – Pay Up In the Year of Death

After you die, your surviving spouse or whoever files your final year’s tax return can choose to include all the accumulated interest earned until your date of death on your final tax return. Then the second owner or the beneficiary will pay tax only on the interest earned going forward.

Your surviving spouse or the executor of your estate will need to do the calculation themselves if they choose this option. TreasuryDirect won’t generate any 1099 form unless they cash out your I Bonds.

Your second owner or beneficiary needs to keep documentation to show how much interest was already added to your final tax return for the bonds they inherited. When they cash out the bonds or when the bonds mature, the 1099 form will still show all the interest since the beginning. They’ll have to remember to back out the interest that was already included on your final tax return. See IRS Publication 559 (page 11).

Because it can be many years until they cash out the bonds or when the bonds mature, it’s quite possible they’ll forget and they’ll pay tax again on the whole thing when they have a 1099 form in front of them. I think it’s better to just go with the default and not go out of the way to pay up in the year of your death.

Optional – Report Interest Every Year

Reader Jeff left this comment on my How to Buy I Bonds post:

Your comment on taxation is a bit misleading. Yes, you can wait until maturity to declare the interest in you income. However, you do have the option of declaring the interest annually on your tax return. In some cases that can be better, especially for younger buyers who don’t have much (or any) taxable income to report.

I admit I left that part out of the scope of the introduction to I Bonds because it’s more of an advanced tactic. Let’s go into it now.

IRS Publication 550 says this on page 7:

Method 2. Choose to report the increase in redemption value as interest each year.

You must use the same method for all Series EE, Series E, and Series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.

Method 1 is the default we talked about already — you wait until you cash out or the bonds mature. Method 2 is appealing when you’re in a low tax bracket. You avoid having all the accumulated interest come as income in one year when you cash out or when the bonds mature. As Jeff mentioned, this is especially true when I Bonds are owned by a child, whose standard deduction and low tax brackets may otherwise go unused each year.

This optional Method 2 is doable in theory but it brings a lot of complications in real life.

No Annual 1099

You don’t get much help if you choose Method 2. It’s not like you can change a setting in your TreasuryDirect account and you’ll start receiving 1099 forms each year. TreasuryDirect will always assume you’re going with the default. You’ll have to figure out on your own how much interest to report each year.

No Periodic Statements

You see the current values of your I Bonds when you log in to your TreasuryDirect account. TreasuryDirect doesn’t produce any monthly or annual statements showing you the historical values and how much interest you earned during any month or year. When you’re doing taxes in March, it’s a small challenge just to figure out what the values were as of the beginning of this year or the end of last year.

Value on December 31 or January 1?

The IRS publication only says to report “the increase in redemption value” but it doesn’t say between which dates. Is it from January 1 to December 31? Or is it from December 31 of the prior year to December 31? Or is it from January 1 to January 1 of the following year?

The values on December 31 and January 1 are the same in most other financial instruments because January 1 is always a holiday. That’s not the case for I Bonds. I Bonds get the interest from the previous month on the first of each month. The redemption value on January 1 includes interest from December whereas the redemption value on December 31 does not.

If you count the increase using the values from January 1 to December 31 each year, you only include interest from 11 months. That can’t be right.

When it comes to taxes, the cutoff is usually December 31. If you use December 31 to December 31, you include interest from December of the prior year through November. That’s odd, but maybe that’s how they want it?

If you use January 1 to January 1, you include interest from January to December, but are you supposed to use January 1 of the following year as the valuation date?

It’s not clear how you should calculate “the increase in redemption value” to report as interest on your tax return.

Unrealized Early Withdrawal Penalty

The redemption values you see in TreasuryDirect automatically exclude the potential three-month early withdrawal penalty when the bonds are within their first five years. It’s not clear whether “the increase in redemption value” should adjust for this unrealized early withdrawal penalty or not.

When you have a bank CD, the interest is first paid, which you pay tax on, and you deduct the early withdrawal penalty if you withdraw early. If you use the redemption values of your I Bonds as shown by TreasuryDirect, you will have the early withdrawal penalty pre-deducted whether you actually withdraw early or not. You will have three fewer months of interest in the first year and 15 months of interest in the sixth year (instead of the normal 12 months). Again, that’s odd but maybe that’s how they want it?

Bond-by-Bond Tracking Required

When you report interest annually, you make one entry on your tax return for all the I Bonds you own. When you finally cash out one of them, TreasuryDirect still assumes you’re going with the default and the 1099 form will include all the accumulated interest. You’ll need to back out all the interest you reported in previous years for that one bond you cashed out.

If you only rely on previous tax returns, (a) you’ll need to go back many years; and (b) getting the total for all bonds from previous tax returns isn’t enough. You’ll need the details bond by bond. If you only cash out part of a bond, you need to make further adjustments and also account for previous partial cashouts of the same bond.

If you use a tax preparer and you want them to track and report the interest every year, the extra cost required for this bond-by-bond tracking can easily overwhelm any tax savings from using the optional reporting method.

Risk of Paying Tax Twice

If you have been reporting interest every year and now someone else has to do your taxes for whatever reason, they may not know what was done before. It’s very easy to pay tax again when they have a 1099 form in front of them because that’s the default.

Savings Bond Calculator

If you really really want to take on reporting interest annually, it’s helpful to use the Savings Bond Calculator from TreasuryDirect. The calculator shows you the redemption value of an I Bond as of a given date.

The stand-alone calculator isn’t integrated into your TreasuryDirect account. Please read the instructions for how to save a list of bonds you own. Use Firefox or Safari when you save your list. It doesn’t work with Chrome or Microsoft Edge. You’ll have to update the list manually as you acquire new bonds and cash out old bonds.

Build and maintain a spreadsheet. Decide on whether you should calculate the increase in redemption values using December-to-December values or January-to-January values and whether you should make any adjustments for the unrealized early withdrawal penalty during the first five years. Update the values in your spreadsheet with the values from the Savings Bond Calculator. Save screenshots of the Savings Bond Calculator as your documentation if necessary.

***

Now you know why I left out the optional tax reporting method. It’s much more complicated in real life than just that one sentence in the IRS publication. I’m not sure the juice is worth the squeeze. I happily go along with the default for my I Bonds.

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Where to Get a Signature Guarantee for I Bonds at TreasuryDirect

Opening an account at TreasuryDirect to buy I Bonds is an easy process for most people. It takes less than 15 minutes (see How to Buy I Bonds). However, a small percentage of people run into an issue with ID verification. They are asked by TreasuryDirect to get a signature guarantee on a paper form FS 5444.

TreasuryDirect uses an automated third-party service to run ID verification. Many other financial institutions do the same for opening accounts online. Your account is kicked off to an exception process when the automated service says they can’t verify your identity based on the given information. When this happens at other financial institutions, they may ask you to upload pictures of your driver’s license or show up with your ID at a physical branch. Because TreasuryDirect doesn’t have any physical branch, they ask you to get a signature guarantee on a paper form and mail it to them.

Unrelated to Credit Freeze

Failing ID verification isn’t caused by having a credit freeze. You can still pass with a credit freeze in place. You don’t need to unfreeze your credit before you open an account with TreasuryDirect.

It has more to do with matching your name, date of birth, Social Security Number, driver’s license number, address, and phone number. If you moved recently, the ID verification service may fail you because they don’t have the updated information yet. Or perhaps the ID verification service simply doesn’t have all the information for everyone. It’ll return a failure when it can’t match the information.

It’s not your fault. The automated ID verification service just isn’t 100% reliable. You’ll have some extra work if you’re unlucky.

Required for Changing Bank Account

TreasuryDirect also requires a signature guarantee on Form FS 5512 when you want to change the bank account linked to your account. This is why you should choose a bank account that you intend to use for a long time when you open your TreasuryDirect account. Changing it down the road will require more work.

Once you have the bank account linked, cashing out bonds won’t require a signature guarantee again.

Certifying Officer

You need the signature guarantee from a “certifying officer.” This officer can be someone at a bank, a credit union, or a brokerage firm. You sign in front of the officer. The officer signs the form after verifying your ID.

If you need a signature guarantee because you’re changing the linked bank account, the certifying officer doesn’t have to be from the same bank. The form from TreasuryDirect says a notary public isn’t an acceptable certifying officer.

You don’t need to go to a place where you have an account, although being a customer certainly helps. They’re only doing you a favor because TreasuryDirect isn’t paying them and they have no obligation to do it. It’s easy for them to say no for fear of liability or simply because they haven’t seen it before.

If you go to a bank or a credit union, talk to someone working at a desk, not a teller. The teller may not be familiar with it. Try to catch someone more experienced who may have done it before. Ask nicely. If you get a “no” from someone, try a different branch or go to a different bank. Try a credit union or a small community bank, which may be more community-minded and willing to go the extra mile.

When I needed it, I made an appointment at a Bank of America branch and they did it for me.

Not a Medallion Signature Guarantee

TreasuryDirect asks for a signature guarantee, not necessarily a medallion signature guarantee. A medallion signature guarantee is one form of acceptable signature guarantee but it’s not the only one.

A medallion signature guarantee is a program of the securities industry. It’s used more for transferring brokerage accounts. If your broker has a physical branch near you, you can try there but many brokers only give medallion signature guarantees when it involves their own accounts. They don’t do it for outside accounts. If you have large accounts at the broker, they may agree to make an exception.

Many banks and credit unions don’t give medallion signature guarantees but the [normal] signature guarantees they give for signing checks will work for TreasuryDirect. So don’t start your conversation at a bank or a credit union by asking for a medallion signature guarantee. Simply say you need a signature guarantee.

Notarize with a Note

If you have a really hard time finding someone at a bank, a credit union, or a broker to give you the signature guarantee, some people reported that TreasuryDirect accepted the form with a notary stamp when they attached a note saying they couldn’t get any certifying officer to sign the form.

It’s not guaranteed this will always work but it’s worth trying as a last resort when you’re denied by the local institutions.

Mail and Wait

If you succeed in getting a signature guarantee from someone willing to accommodate, now you mail it to the address on the form and wait. It may take 2-3 weeks for TreasuryDirect to complete the process. You’ll receive an email when it’s done.

I had to do this recently for changing the linked bank account. I mailed the form on December 20th. It was processed on January 4th. The turnaround time isn’t too bad, considering the mailing time, the holidays, and the flurries of activities at the end of the year. Just have some patience and let the process run its course.

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How to Add a Joint Owner or Change Beneficiary on I Bonds

When you have an account with a bank or a brokerage account, usually you can designate a beneficiary (or multiple beneficiaries with split percentages) for your account. The beneficiary gets everything in your account in case you die. It works differently when you have I Bonds in a personal account at TreasuryDirect, where your second owner and beneficiary are set separately for each holding, not for the whole account.

In This ArticleRegistration at Time of PurchaseReview Current RegistrationsCreate Your Desired RegistrationAssociate New Registration to Existing BondsGrant Transact or View RightsDeposited Paper Bonds with Joint OwnershipRegistration at Time of Purchase

Within the same TreasuryDirect account, you can own some bonds by yourself without any second owner or beneficiary, some bonds with Person A as the second owner (“you WITH A”), some bonds with Person B as the second owner (“you WITH B”), some bonds with Person C as the beneficiary (“you POD C”), and some bonds with Person D as the beneficiary (“you POD D”). POD stands for Pay On Death. Most people probably don’t need this level of granularity but it’s an option. For more on the difference between a second owner and a beneficiary, please read I Bonds Beneficiary vs Second Owner in TreasuryDirect.

These options are only available in a personal account. An entity account for a trust or a business can’t have bonds with a second owner or a beneficiary. A trust or a business also can’t be designated as a second owner or a beneficiary. The second owner or beneficiary must be a person.

You designate the second owner or the beneficiary at the time of each purchase. The granularity compensates for the lack of designating multiple beneficiaries by percentages at the account level. While you can’t designate 50:50 between your two children as beneficiaries for the whole account, you can enter two orders every time you buy $10,000 worth of I Bonds: one order for $5,000 with Child A as the beneficiary and another order for $5,000 with Child B as the beneficiary.

Each ownership combination — you alone, you WITH person X as the second owner, or you POD person Y as the beneficiary — is called a registration. You can have as many registrations as you’d like and you can associate any one of your registrations to any bond in your account.

The registration for a bond you set at the time of purchase can be changed post-purchase. If you didn’t set a second owner or a beneficiary when you first bought the bonds or if you change your mind at a later time, you can add, remove, or change the second owner or the beneficiary at any time.

Review Current Registrations

Before you make any changes to the registration on any of your bonds in the account, you should review how they’re currently set and see which ones need to be changed. After you login to the account, click on “Current Holdings” at the top.

Then scroll down to the bottom and select Series I Saving Bond.

You will see a list of your bonds grouped by your existing registrations. Take notes for which bonds you’d like to make a change.

Create Your Desired Registration

Now, you need to create a registration with the ownership combination you’d like to have. Say you originally bought the bond with your name alone and now you’d like to add a second owner, or you’d like to elevate your beneficiary to a second owner, you should create a registration for you with this person as the second owner (“you WITH X”). Or if you’d like to change your beneficiary to a different person, you should create a registration for you with this new person as the beneficiary (“you POD Y”).

Click on “Update my Registration List” under ManageDirect.

You’ll see a list of existing registrations in your account. Click on “Add Registration” to create a new one.

The radio buttons at the top shows the registration types. Sole Owner means you alone, without a second owner or a beneficiary. Primary Owner means you with a second owner. Beneficiary means you with a beneficiary. If you chooses Primary Owner or Beneficiary, enter yourself as the First-Named Registrant and the second owner or the beneficiary as the Second-Named Registrant.

The new combination will be added to your list of registrations. It’s not associated with any bonds yet. If you’d like to use this new registration for all new bonds you buy in the future, select it in the list and click on the “Preferred Registration” button.

Associate New Registration to Existing Bonds

Making a new registration your preferred registration only affects the default for new bonds you buy in the future. To change the registration on your existing bonds, click on “Edit a registration” under ManageDirect.

Scroll down to the bottom and select Series I Savings Bond.

You will see a list of your I Bonds. Check the box for the ones you’d like to change. Or check all of them if you’d like to change the registration for all existing bonds.

Choose your desired registration in the dropdown. The bonds you selected will change to this new registration after you click on Submit. As long as you’re still the primary owner, changing the registration doesn’t trigger taxes.

Grant Transact or View Rights

If you granted Transact or View rights to the previous second owner or beneficiary, those rights will be automatically canceled after you change the Registration. You’ll need to grant Transact or View rights to your new second owner or beneficiary if you’d like. For more on why you may want to grant Transact or View rights and a walkthrough of how to do it, please read How To Grant Transact or View Right on Your I Bonds.

Deposited Paper Bonds with Joint Ownership

If you have bonds in your account that originated from paper bonds you bought with your tax refund (see Overpay Your Taxes to Buy I Bonds and How To Deposit Paper I Bonds to TreasuryDirect Online Account), those bonds may have been issued to you and your spouse jointly (“you OR spouse”) when you filed a joint tax return.

This “OR” type of ownership is different than the “you WITH X” type of ownership in that the two owners are equal. There’s no primary owner or second owner in the “OR” type of ownership. One owner can’t kick out the other owner without the other owner’s consent. The “OR” ownership is preserved when paper bonds are deposited into the TreasuryDirect account. These bonds become “restricted securities” and you can’t change the registration on them.

If you don’t like this restriction, don’t use Box 4 on IRS Form 8888 when you buy I Bonds with your joint tax return. Use Line 5a and enter only one name. Alternate the owner between you and spouse in different years.

You can change the registration and grant rights after you deposit the paper bonds with only one name. This way you can have the same registration for all the bonds in your account.

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Buy I Bonds as a Gift: What Works and What Doesn’t

My previous posts covered buying I Bonds in a trust, , and buying I Bonds for your business. Let’s look at another way to buy I Bonds this time: buying them as a gift. For background on I Bonds in general, please read How To Buy I Bonds.

Table of ContentsGift Box and DeliveryPurchase LimitInterest and Holding PeriodGift to KidsWhen Gifts Are Useful and When They Are NotOfficial Walkthrough VideosGift Box and Delivery

You buy I Bonds as a gift in two stages: buying and delivering.

You must give the recipient’s name and Social Security Number in the buying stage. Only a personal account can buy or receive gifts. A trust or a business can neither buy a gift nor receive a gift.

The bonds you buy as a gift go into a “gift box.” You can’t cash out the bonds stored in your gift box. This is analogous to you going to a store and bringing back the gift to your closet. The gift already has the recipient’s name on it. You can’t steal the gift for yourself.

The recipient doesn’t know you bought a gift for them until you deliver the gift to them. This is analogous to bringing the gift from your closet when you visit family. You’ll need the recipient’s account number to deliver a gift.

I Bonds stored in your gift box are in limbo. You can’t cash them out because they’re not yours. The recipient can’t cash them out either because they don’t have them yet.

There’s a minimum wait of five business days between buying and delivering to make sure your bank debit clears. There’s no maximum stay in the gift box. You can pre-purchase gifts and wait to deliver them at a much later time. You can also choose to deliver gifts in bits and pieces as opposed to in one lump sum.

Purchase Limit

Delivered gifts count toward the $10,000 annual purchase limit of the recipient in the year of delivery. You can still buy gifts for others even if you already bought the maximum for yourself.

You can buy a maximum of $10,000 for any recipient in one purchase but there’s no limit in how many recipients you buy for or how many times you can buy for the same recipient in any calendar year. If you’d like, you can buy $10,000 worth of I Bonds for each of your 20 family members or you can make 5 separate purchases of $10,000 each for the same family member, all in the same calendar year. The limit is in how much you can deliver to the same recipient in the same calendar year.

If the recipient also bought the maximum for themselves this year, delivering additional I Bonds to them will put them over their annual purchase limit. You’ll have to wait to deliver in a year they’re not buying the maximum themselves. If you bought more than $10,000 as gifts for the same recipient, you’ll have to wait to deliver the gifts across multiple years.

Interest and Holding Period

Interest and the holding period start in the month of your purchase. If you pre-purchase gifts and wait to deliver them to the recipient at a later time, bonds in the gift box still earn interest before delivery. The holding period for cashing out also starts right away. If five months have passed between the time of purchase and the time of delivery, the recipient only has to wait another seven months before they can cash out as opposed to the full 12 months for freshly purchased bonds.

Gift to Kids

It’s not necessary to buy as gifts for your own kids. As the parent, you can open a minor linked account in your account and buy directly in your kid’s name. See previous post .

Buying I Bonds as a gift works for a grandchild or a niece or a nephew. The child’s parent needs to open a minor linked account under the parent’s account and give you the child’s Social Security Number and account number.

When Gifts Are Useful and When They Are Not

If you’re thinking of “borrowing” other people’s names and Social Security Numbers to buy more I Bonds as gifts but keep the bonds for yourself, it doesn’t work. Only the named recipient can cash out the bonds. If you don’t deliver them, the bonds stay in your gift box, and neither you nor the specified recipient can cash them out. After you deliver the gift bonds, it’s the recipient’s money, and they can do whatever they want with the bonds.

If you’re thinking of letting others buy I Bonds as gifts for you to work around the $10,000 annual purchase limit, it doesn’t quite work either. Gifts delivered to you count toward your annual purchase limit. If you already bought your maximum for the year, having additional gift bonds delivered to you in the same calendar year will put you over the limit.

Buying I Bonds as a gift works when you want a family member to have some I Bonds but they don’t have spare cash. It works the same as giving them money and letting them buy themselves.

It also works to a limited extent if you think the high interest rates on I Bonds are only temporary. You can buy a gift for your spouse and hold it in your gift box. Have your spouse do the same for you. When interest rates drop and the two of you don’t buy I Bonds anymore, you can deliver the gift to each other. The older gift bonds earned the high interest rates in the years past and they have aged enough for immediate cashout. Because there’s a limit in how much you can deliver to the same person each year, don’t go overboard with this. If you hold $100,000 in the gift box and the interest rates are no longer competitive, those bonds will be in limbo for a long time while earning uncompetitive interest rates.

Official Walkthrough Videos

If you’re ready to buy I Bonds as a gift, please watch these walkthrough videos on the TreasuryDirect website:

Purchasing a Gift Bond – The video shows buying a Series EE bond. Make sure to select Series I when you’d like to buy I Bonds.

Delivering a Gift Bond – Remember to check with the recipient how much they bought or are planning to buy this year themselves.

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2022 New IRS Required Minimum Distribution (RMD) Tables

People age 72 and above are required to withdraw a minimum amount from their pre-tax retirement accounts each year. This makes sure taxes aren’t deferred forever. It’s called Required Minimum Distributions (RMD). The required amount is a percentage of the account’s balance as of December 31 of the previous year. The required percentage goes up with age, reflecting the reduced life expectancy.

Back in 2018, President Trump signed an executive order directing the IRS to study the life expectancy tables used to determine RMDs and see whether they should be updated to reflect longevity improvements over the years. They did that and published a new set of RMD tables for years starting on or after January 1, 2022. These new tables will lower RMDs slightly for most ages.

However, maybe because it’s still early, the IRS hasn’t yet updated its Publication 590-B to show the new tables. Meanwhile, people planning to take the required minimum distributions in 2022 need to know how much they must take from their retirement accounts to comply with the new regulations.

The new tables are out there. They’re just not in the IRS publication yet. The IRS published them in the Federal Register in November 2020. The Federal Register is the place for official records of the federal government. It’s like the books in the county recorder’s office where all the land deeds are recorded.

Here are the links in the Federal Register for the three new RMD tables. The Uniform Life Table is the most commonly used table. Use this table when you are:

unmarried; ormarried and your spouse isn’t more than 10 years younger than you; ormarried and your spouse isn’t the sole beneficiary of your account

Use the Joint and Last Survivor Table when your spouse is more than 10 years younger and is the sole beneficiary. Use the Single Life Table when you’re a beneficiary of an inherited retirement account.

Uniform Life Table

I’m reproducing the most commonly used Uniform Life Table here for your convenience.

A factor of 27.4 at age 72 means that out of a $1 million total balance in the pre-tax retirement accounts as of December 31 of the previous year, someone who reaches age 72 in the current year must withdraw a minimum of:

$1,000,000 / 27.4 = $36,496.35

The factor for age 72 in the previous table was 25.6, which means the required minimum distribution would’ve been:

$1,000,000 / 25.6 = $39,062.50

The new table reduces the RMD by $2,556.15, which saves a few hundred dollars in taxes.

AgeDistribution Period7227.47326.57425.57524.67623.77722.97822.07921.18020.28119.48218.58317.78416.88516.08615.28714.48813.78912.99012.29111.59210.89310.1949.5958.9968.4977.8987.3996.81006.41016.01025.61035.21044.91054.61064.31074.11083.91093.71103.51113.41123.31133.11143.01152.91162.81172.71182.51192.3120+2.0Uniform Life Table Effective 1/1/2022One-Time Reset for Inherited Accounts

When you’re taking RMDs from your own accounts, you look up your age each year in the applicable table and use the associated factor to calculate your RMD. It works differently when you’re taking RMDs from an inherited account.

When you take the RMD from an inherited account in the first year, you look up the factor in the Single Life Table by your age. For the second year and beyond, you don’t go back to the table again. You remember the factor used in the previous year and you reduce it by 1.

Now, if you already started taking RMDs from an inherited account and the tables changed, the IRS allows you a one-time reset. You look up the factor in the new Single Life Table by your age in the year when you first started taking RMD from the inherited account. Then you reduce the factor by the number of years since then. This makes as if the new tables were in effect back when you started.

Source: Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions, Internal Revenue Service, T.D. 9930

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2022 New Required Minimum Distribution (RMD) Tables

People age 72 and above are required to withdraw a minimum amount from their pre-tax retirement accounts each year. This makes sure taxes aren’t deferred forever. It’s called Required Minimum Distributions (RMD). The required amount is a percentage of the account’s balance as of December 31 of the previous year. The required percentage goes up with age, reflecting the reduced life expectancy.

Back in 2018, President Trump signed an executive order directing the IRS to study the life expectancy tables used to determine RMDs and see whether they should be updated to reflect longevity improvements over the years. They did that and published a new set of RMD tables to be used effective January 1, 2022. These new tables will lower RMDs slightly across all ages.

However, maybe because it’s still early, the IRS hasn’t yet updated its Publication 590-B to show the new tables. Meanwhile, people planning to take the required minimum distributions in 2022 need to know how much they must take from their retirement accounts to comply with the new regulations.

The new tables are out there. They’re just not in the IRS publication yet. The IRS published them in the Federal Register in November 2020. The Federal Register is the place for official records of the federal government. It’s like the books in the county recorder’s office where all the land deeds are recorded.

Here are the links in the Federal Register for the three RMD tables. The Uniform Life Table is the most commonly used table. Use this table when you are:

unmarried; ormarried and your spouse isn’t more than 10 years younger than you; ormarried and your spouse isn’t the sole beneficiary of your account

Use the Joint and Last Survivor Table when your spouse is more than 10 years younger and is the sole beneficiary. Use the Single Life Table when you’re a beneficiary of an inherited retirement account.

Uniform Life Table

I’m reproducing the most commonly used Uniform Life Table here for your convenience.

A factor of 27.4 at age 72 means that out of a $1 million total balance in the pre-tax retirement accounts as of December 31 of the previous year, someone who reaches age 72 in the current year must withdraw a minimum of:

$1,000,000 / 27.4 = $36,496.35

The factor for age 72 in the previous table was 25.6, which means the required minimum distribution would’ve been:

$1,000,000 / 25.6 = $39,062.50

The new table reduces the RMD by $2,556.15, which saves a few hundred dollars in taxes.

AgeDistribution Period7227.47326.57425.57524.67623.77722.97822.07921.18020.28119.48218.58317.78416.88516.08615.28714.48813.78912.99012.29111.59210.89310.1949.5958.9968.4977.8987.3996.81006.41016.01025.61035.21044.91054.61064.31074.11083.91093.71103.51113.41123.31133.11143.01152.91162.81172.71182.51192.3120+2.0Uniform Life Table Effective 1/1/2022

Source: Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions, Internal Revenue Service, T.D. 9930

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What If Congress Bans Backdoor Roth in 2022?

[Updated and rewritten on December 19, 2021 after Congress decided to postpone the Build Back Better legislation to 2022.]

President Biden and Congress have been working on the Build Back Better legislation for some time. The House already passed a bill. The Senate has come up with a draft bill. There are some differences between the two versions and there are still some disagreements in what exactly should go into the Senate bill. However, one thing not in disagreement is that Congress wants to ban the backdoor Roth and the mega backdoor Roth. Both the House and the Senate agree this will be part of the Build Back Better package if and when it passes.

These changes, if they become law, will have these effects:

IRAEmployer PlanMake non-Roth after-tax contributionAllowedAllowedConvert pre-tax money to RothAllowed*Allowed*Convert after-tax money to RothNot allowedNot allowed

* Allowed for everyone through 2031. Still allowed after 12/31/2031 unless your income is above $400k (single) or $450k (married filing jointly).

You can still make non-Roth after-tax contributions, but you can’t convert those non-Roth after-tax contributions to Roth. This ban covers converting after-tax money from a traditional IRA to a Roth IRA, rolling over after-tax contributions from an employer plan to a Roth IRA, and converting after-tax money in an employer plan to the Roth account within the plan.

Due to the disagreements in other parts of the bill unrelated to backdoor Roth and mega backdoor Roth, Congress decided to continue their discussion in 2022. If and when they finally reach an agreement, the effective date will be sometime in 2022 or later.

What should you do if these proposed changes move forward and become law in 2022?

Roth Conversion Isn’t Backdoor Roth

First of all, many people confuse backdoor Roth with a plain vanilla Roth conversion. Although backdoor Roth uses Roth conversion as its second step, a straight-up Roth conversion of pre-tax money isn’t backdoor Roth.

The bills in the House and the Senate allow converting pre-tax money to Roth by anyone for at least 10 years through the end of 2031. Starting in 2032, only those with a high income won’t be allowed to convert pre-tax money. That’s 10 years from now. Who knows what will change by then. If you’re only worried about a plain vanilla Roth conversion, please understand it isn’t affected for at least 10 years.

Backdoor Roth – 2021

If the proposals become law in 2022, you’re still allowed to make nondeductible contributions to a traditional IRA but you won’t be allowed to convert them to Roth after an effective date to be determined but it doesn’t affect converting to Roth on or before 12/31/2021.

If you’re planning to make the nondeductible traditional IRA contribution for 2021 between January 1 and April 15 in 2022, hurry up. Make the contribution for 2021 now and convert it to Roth before December 31, 2021. If you wait until 2022 to make your nondeductible contribution, it’s possible you won’t be able to convert to Roth and your contribution will be stuck in the traditional IRA.

If you’re planning to contribute or if you already contributed to your Roth IRA directly and there’s any chance that you will exceed the income limit for 2021 ($125,000 single, $198,000 married filing jointly), make it a backdoor Roth now. When you find you exceed the income limit, normally you can recharacterize your Roth IRA contribution to a nondeductible traditional IRA contribution and convert it in the following year but it’s possible you won’t be able to do that in 2022. So go through the backdoor now. Make a nondeductible contribution to a traditional IRA and convert before 12/31/2021.

In either case, you have to do some work to prepare for the backdoor Roth. See Backdoor Roth: A Complete How-To.

Mega Backdoor Roth – 2021

If your employer’s plan allows non-Roth after-tax contributions, make sure you contribute the maximum allowed in 2021 and convert them before 12/31/2021.

Some plans do an automatic conversion on the same day. You’re covered if you signed up for the automatic conversions. If your plan doesn’t offer automatic conversion and you forget to convert manually, it’s possible your non-Roth after-tax contributions will be stuck.

What About 2022?

As the President and Congress continue their discussion into 2022, we don’t know what the final outcome will be. If you normally do the backdoor Roth in January, should you proceed as usual or should you wait until it’s clear which way it will go? If you’re currently making non-Roth after-tax contributions to an employer plan, should you continue or pause those after-tax contributions?

I see these four possible scenarios:

1. Law Doesn’t Change

It’s possible the discussion reaches an impasse and the bill doesn’t pass in the Senate. If you proceed as usual, you’ll get your backdoor Roth in January. If you wait until say May to learn that the legislation died, you still have time to complete your backdoor Roth and mega backdoor Roth. The difference is only in when, not whether, you complete your backdoor Roth and mega backdoor Roth.

2. Law Changes, Effective 1/1/2023

It’s also possible that the bill passes in the Senate in 2022 with a ban of backdoor Roth and mega backdoor Roth effective 1/1/2023. As far as 2022 is concerned, this is the same as the previous scenario. Either way you’ll get it done in 2022 and the only difference is in which month.

3. Law Changes, Effective Mid-Year with No Advance Warning

Another possibility is the bill passes with no advance warning. Say the bill passes on March 10 with an effective date of March 11. They often do that to avoid a last-minute mad dash to beat the clock. By the time the law changes, it’s already too late to make any changes. Meanwhile, those who performed backdoor Roth and mega backdoor Roth before the effective date won’t be affected.

In this scenario, you’re better off doing the backdoor Roth and mega backdoor Roth before the law changes. You snooze, you lose.

4. Law Changes, Effective 1/1/2022

It’s also possible that the tax law changes will be made retroactive to January 1, 2022. It’s legal and it happened before.

Currently, a Roth conversion or an in-plan Roth rollover can’t be reversed (“recharacterized”). If you already completed the conversion before it’s made illegal retroactively, I imagine they will also give you a one-time exemption to undo it. If you go ahead under the current law, you’ll have the hassle of unwinding your conversion.

In summary,

Proceed ASAPWaitBill fails$$ in Roth$$ in RothLaw changes, effective 1/1/2023$$ in Roth$$ in RothLaw changes mid-year$$ in Rothmiss opportunityLaw changes retroactively to 1/1/2022unwind conversionno extra work

Whether you should go ahead as soon as you can or wait until it’s clear on how the law will change depends on how badly you don’t want to miss an opportunity versus how much you hate the possible hassle of having to undo a conversion. I will proceed ASAP in my personal accounts, but only you can make the decision for yourself.

A Big Loss?

Is it a big loss if the proposed changes become law and you can’t do backdoor Roth and mega backdoor Roth anymore?

It’s a loss because tax-free growth beats tax deferral on the earnings or the lower tax rates on qualified dividends and long-term capital gains. However, the power of saving and investing comes from making the contributions to begin with, not from how the investment returns are taxed.

A taxable account always works. In the end, even if all the tax-advantaged accounts go away and all the returns are taxed as regular income, those who save and invest more will still succeed. You take advantage of all available tax savings but you can’t stake your success on specific tax breaks.

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