Published on: 12/01/2023
Biden 2024 Budget Proposal: Will Roth Conversions Be Banned?
As you may have heard in recent news, the Biden 2024 Budget Proposal has been officially released, and many high-net-worth individuals are understandably nervous. The proposal contains similar language to 2021’s Build Back Better Plan, which made it through the House but stalled on the Senate floor.
So, do you need to worry about the Biden Budget Proposal and its potential looming effect on your financial plan? Not yet, but you should be in contact with your trusted financial advisor to make sure that you are prepared for any eventuality.
In the meantime, the fiduciary financial professionals at Avidian Wealth Solutions are here to outline what exactly is proposed in the Biden Budget 2024 Proposal, to better give you an idea of what you can expect if it passes.
What is the Biden Budget Proposal of 2024?
The Biden Administration’s White House Budget Proposal 2024 contains many provisions that set out to raise tax revenue for the government. The areas of the most interest within the Budget Proposal contain some language that seeks to potentially ban Roth conversions for high-income earners and backdoor Roth strategies.
Will the 2024 budget pass? No one can say for certain, but if it does, the ban would be scheduled to take place after 12/31/23.
Let’s get into what banning Roth conversions and backdoor strategies looks like, and what it might mean for high-net-worth individuals.
What are Roth funds?
As a review, when discussing ‘Roth’ strategies (such as conversions and backdoors), we are referring to money that is moved into a Roth IRA or Roth 401(k) from a pre-tax retirement account (such as a Traditional IRA or regular 401(k)). Within Roth accounts, after-tax money is used for funding, and then the funds grow and distribute tax-free. Roth funds do not have any required minimum distributions in retirement, so the funds can continue to grow tax-free for a long time. Additionally, when Roth funds are inherited, they are not taxable to the beneficiary — so there are advantages to leaving behind Roth funds as inheritances as opposed to standard IRA funds, which will be taxable.
What is a Roth conversion?
A conversion occurs when pre-tax money (such as money in a regular 401(k) or traditional IRA) is taxed, and the residual proceeds are moved into a Roth IRA. Conversions are generally made by high-income earners who look to take advantage of Roth Account tax benefits. Conversions offer an avenue for individuals to electively pay tax on pre-tax funds, typically during low-income years, to house the future growth of their retirement funds in a tax-efficient Roth Account while also reducing future required minimum distributions.
What is a backdoor Roth?
A backdoor Roth strategy is just one of many tax strategies for retirees to utilize during their retirement income planning, but it is a very powerful tool. Backdoor Roth strategies refer to the process of utilizing after-tax contributions made to a 401(k) plan that is subsequently converted into Roth funds. Backdoor Roth strategies are made possible when a 401(k) plan allows for ‘after-tax’ contributions, either ‘in-service rollovers’ to a Roth IRA or ‘in-plan conversions’ to a Roth 401(k).
High-income earners sometimes opt to deploy backdoor Roth Strategies because their income exceeds the phase-out limit for making personal Roth IRA contributions. This strategy can provide an additional tax-efficient vehicle for their savings.
For example, in 2023, a high-income earner can save $66,000 within their 401(k) between their own contributions and their employers, and there are no income limits to participate in these plans. The personal pre-tax contribution limit is currently $22,500 (or $30,000 with the catch-up provision if age 50+), which reduces taxable income. This means high-income earners can contribute an additional $43,500 of after-tax money in their 401(k) and have these funds moved into a Roth Account to secure tax-free treatment.
What is going to happen?
Looking at history, a similar ban was illustrated in 2021 under Biden’s ‘Build Back Better Plan’, which passed the House but ultimately stalled in the Senate. Ultimately, the ban did not pass and was used more as a negotiating point when dealing with opposing congressional members. A similar process will likely take place this time around, but it is essential to plan for either outcome.
As it stands, Roth conversions and backdoor Roth strategies are still available for individuals and can be explored as an option for tax-efficient savings and estate planning. Taxpayers should contact their financial planners before the fiscal year 2024 budget proposal passes to determine if either of the aforementioned strategies is right for them under the current laws.
Worried about the Biden 2024 Budget Proposal? Contact Avidian Wealth Solutions and ease your mind.
Because Congress is currently Republican-controlled, the Biden 2024 Budget Proposal may not make it through the Senate — but that shouldn’t stop you from taking advantage of Roth conversions or backdoor strategies available to you now.
Although we can’t predict the future of the White House Budget Proposal in 2024, we do know that Roth conversions and backdoor strategies are currently an option for many high-net-worth individuals and families who are not taking advantage of them.
Avidian Wealth Solutions offers retirement planning services to pre- and post-retirees looking to make the most of their retirement and choose to be able to put their mind at ease during their golden years. Our family office experience can serve those looking for retirement planning in Houston, Austin, Sugar Land, and The Woodlands.
If you’re interested in putting together a retirement plan, lowering your tax liability, and solidifying your retirement income, schedule a conversation with Avidian Wealth Solutions today to get started.
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- How Is Passive Income Taxed?
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