A Deeper Dive into the Build Back Better Act: The Death of ‘Mothra’

Editor’s Note: The House Ways and Means Committee recently approved funding provisions for the Build Back Better Act of 2021, including several retirement plan provisions (starting on page 665, and summarized here.)  

That part of the bill is aimed at limiting the ability of high-income individuals to defer or avoid excessive amounts of taxes through the use of retirement plans, although some of the provisions apply to a broader group of taxpayers. It generally limits high-income taxpayers from making IRA contributions, requires high-income taxpayers to disgorge excess amounts, and prohibits IRAs from utilizing certain investments that have the potential of generating astonishing rates of return, but that are not available to most investors. 

In this last part of a three-part series, ARA Retirement Education Counsel Robert Richter provides a deep dive into the three provisions affecting mega-Roths and backdoor Roths. Part 1, on the provisions affecting RMDs, is here; Part 2, on the provisions affecting IRAs, is here.

The Death of ‘Mothra’ 

Yes, Mothra (a.k.a., the mega-Roth or backdoor Roth) would be killed. (For an explanation of this concept, see this post by ARA Technical Education Director Robert Kaplan.) The Build Back Better legislation would eliminate this tax-planning tactic by prohibiting both rollovers and conversions of after-tax contributions to a Roth IRA. 

For example, a participant in a qualified plan would no longer be able to make an after-tax contribution to the plan and then immediately roll that amount over to a Roth IRA (the mega-Roth). Likewise, an individual who is limited to making a Roth IRA contribution due to the compensation limits would no longer be able to make an after tax-contribution to a traditional IRA and then convert that amount to a Roth IRA (the backdoor Roth). Note that this prohibition would apply to all taxpayers, regardless of their income or the value of their retirement accounts.

The bill provides an additional limitation on high-income taxpayers who have account balances that exceed $10 million. These individuals would be prohibited from electing any type of Roth conversion (i.e., in a qualified plan or in a Roth IRA). The only rollovers they would be able to make would be between designated Roth accounts and/or Roth IRAs.