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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