Potential tax changes in 2021 could mean the end of backdoor and mega backdoor Roth IRA conversions! I explain how this could affect everyday people who are trying to maximize their retirement savings! And what I call the Peter Thiel rules. Add me on Instagram: michellemarki

Today’s video aims to help us be as prepared as possible, no matter what tax changes are happening!

The proposed tax changes are aimed more so at those who bring in higher levels of income, such as $400,000 and above, but not all changes only affect “the rich and wealthy.”

It’s also important for people to know the difference between income and wealth. But there’s a higher likelihood that those who are making a lot in a year tend to save and invest those cash flows.

I explain some of the existing retirement investing accounts and how they could be affected by the proposed tax changes. These accounts include the Traditional Individual retirement account (IRA), Roth IRA, and 401k (both pre-tax and after-tax/Roth).

A lot of people can contribute to these types of accounts. Some who earn too much money get phased out of a Roth IRA. If you’re a single person under 50 making up to $124,000, you can contribute up to $6,000 to a Roth IRA or Traditional IRA. For 50+ there’s catch-up contributions for a total of $7,000 that can be contributed.

But if you’re phased out at making over $140,000, then you can only contribute $6,000 to a Traditional IRA but not the Roth IRA. However, as of 2021 you can do a backdoor Roth IRA conversion by just paying income taxes on what you roll over from the Traditional IRA to the Roth IRA.

The main appeal of doing any conversion to a Roth IRA is that you could grow your investments tax-free and you would not have any required minimum distributions (RMD).

For the 401k in 2021: If you’re under 50, you can contribute up to 19,500, and those who are 50+ can contribute $26,000. Then your employer could contribute up to $38,500 to the 401k, with the total being either $58,000 or $64,500 if you’re below or above age 50.

If you contribute after-tax money to a Roth 401k, then you’ve been able to roll these funds into a Roth IRA in what is called a mega backdoor Roth IRA. This gives you the most you can roll over into the Roth and grow it tax-free forever.

To me, it’s the biggest deal of all that the ability to convert the after-tax Roth 401k into a Roth IRA could be taken away by 2022 because the proposed rules from the House Committee on Ways & Means say “regardless of income level.”

This means that some people may want to finish doing any Roth conversions before a potential deadline of December 31, 2021.

In order to afford the government’s $3.5 trillion budget plan, other proposed changes include: increased corporate tax rates and higher capital gains taxes at 28.8% for certain income levels.

If you’re among the top 1.8% who make over $400,000, after December 31, 2031 (yes 10 years from now), you wouldn’t be able to do any more backdoor Roth IRA conversions with nondeductible (after-tax) contributions from either IRAs or 401ks (employer-sponsored plans).

Worst case scenario for everyday people is our funds remain stuck in a 401k or regular IRA respectively, and then live with required minimum distributions when we’re in our older retirement years.

“Peter Thiel Rule Part 1” is what I nickname the proposed rule of having values across all IRAs and 401ks be $20 million, then the excess is required to be distributed after 12/31/21.

“Peter Thiel Rule Part 2” is what I nickname the proposed rule of accredited investors would not be able to keep any securities in an IRA after 12/31/21.

If you don’t want Uncle Sam to slam the tax door in your face, if you’ve made after-tax contributions in an IRA or 401k, you might want to move that over into a Roth IRA in 2021 so it remains as tax-advantaged as possible. But not everyone can move funds out of a 401k if you’re still working for the same employer.

So thems the breaks if we might have to say goodbye to some of the backdoor possibilities for good.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide:

I look forward to making more investor friends! Please like and subscribe if you learned something or enjoyed my video. Thank you! 🙂

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Disclaimers: This content is for entertainment, information, education purposes only. Michelle is not a financial advisor and is not providing financial, investment, trading, tax advice, or recommendations. Please consult with a professional financial advisor with a fiduciary duty and responsibility if you need help in your situation. All trademarks, logos, and brand names belong to their respective owners….(read more)

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