What are backdoor Roth IRA contributions?

[SK in CV]

With the exception of the curtailing of interest deduction on consumer debt, none of them were in any way retroactive. Those changes didn’t change future tax benefits of current holdings. It didn’t turn non-taxable investments into taxable investments.

Take the changes in depreciation, for instance. Depreciation on assets acquired before the new law were still subject to the old law. Only new assets placed in service after the effective date were subject to the longer depreciation. (which, btw, was still much shorter depreciation lives than had been in effect just a few years earlier.)

The DC limit change was repealed, and never went into effect. It went back to the smaller of 25% of income or $30,000 per year, indexed for inflation. But even had it not been repealed, prior contributions were still allowed, and no previous contributions were subject to tax until withdrawn.

Same with IRA contributions. It didn’t change anything for previously allowed contributions, only future contributions. We get all kinds of things changing future tax laws. But never that I can think of, has a tax free account suddenly become taxable.

Even the interest deduction wasn’t retroactive. It just changed the future deductibility of interest.

There was a change, right about the same time for tax free muni bonds. But it didn’t affect bonds issued before the new law went into effect. Only future issues.

[livinincali]

[quote=SK in CV]With the exception of the curtailing of interest deduction on consumer debt, none of them were in any way retroactive. Those changes didn’t change future tax benefits of current holdings. It didn’t turn non-taxable investments into taxable investments.
[/quote]

I agree that there isn’t a great example of tax laws being changed in a way that takes a non-taxable investment and make it taxable. IRA/Roth’s and other retirement plans don’t have a long history either. It’s not like we lived through a time where the government has been desperate for cash and there were special tax exemptions that could be attacked while these plans were in place.

Look at the conversation about corporate tax loop holes or even something like prop 13, where proponents of changes say it’s not fair that people with money get a special tax break (corps benefiting from prop 13). Roth IRAs are likely held by a small minority of people that are comparatively rich to the general population. How long do you have before someone decides it’s not fair for you to get a tax break on a Roth IRA. Especially if you have considerable other wealth/income. I know they attempt to address that through the contribution side, but look at people trying to back door it. When does abuse get to a point where the government says F that and decides to change the tax implications of a Roth.

What if we do simplify the tax code such that all income is treated that same. Do you really think in a large tax change agreement like that they would carve out a special exemption for Roth IRA income. I think it’s far more likely that if we did get a radical overhaul Roth IRAs would just end up being collateral damage.

Eliminating special treatment for Roth’s in favor of a simplified tax code might fly sometime in the future. Broaden the base eliminate the special interest loop holes (if that means Roth’s get hit so be it).

[Author]

Posts