Backdoor Roth IRA Contributions after Tax Reform

It pays to read the footnotes.

IRC § 408A prohibits direct contributions to a Roth IRA if a taxpayer’s AGI exceeds certain limits. (For the 2018 limits, see the table here). One strategy to circumvent this rule is a backdoor Roth IRA contribution. It works like this.

The taxpayer makes a non-deductible contribution to a traditional IRA. The contribution is non-deductible because the taxpayer (or the taxpayer’s spouse) is covered by an employer-sponsored retirement plan and has adjusted gross income (AGI) in excess of a certain inflation-adjusted threshold (e.g., $121,000 for joint filers in 2018). See IRC § 219. The taxpayer then converts the traditional IRA to a Roth IRA.

By exploiting a discrepancy between the traditional IRA and Roth IRA contribution rules, the backdoor Roth IRA contribution technique allows a taxpayer to accomplish indirectly what he could not accomplish directly. For this reason, some commentators have expressed doubts about this approach.  Their fear was that the IRS would consider the strategy abusive and disallow the contributions.

That was before the Tax Cuts and Jobs Act. Although the Act itself does not address the issue, guidance can be found in the “Joint Explanatory Statement of the Committee of Conference” (“Conference Report”). Title I, Section E includes a brief overview of the IRA rules. Buried in footnotes 268 and 269 is the following statement:

Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.

In addition, footnote 276 provides:

The provision does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization.

Likewise, footnote 277 says:

In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the provision precludes the individual from later unwinding the conversion through a recharacterization.

The footnotes give no indication that there is anything controversial about backdoor Roth IRA contributions. Instead, the footnotes seem to take for granted that the technique is valid. Because the Tax Cuts and Jobs Act did not change the relevant law in this area, this should hold true for backdoor contributions made both before and after tax reform.

For background on the recharacterization issue mentioned in footnotes 276 and 277, see the discussions here and here.

For more on the Tax Cuts and Jobs Act, click here.

Source: Joint Explanatory Statement of the Committee of Conference, pp. 114, 116 (pdf)

Posted by Joel D. Roettger, JD, LLM, EPLS

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