Saving for retirement isn’t just about ourselves—it’s also about creating a legacy that can be passed on to our loved ones. Thankfully, many different avenues and options are available to us as we build our retirement portfolios—so when one option is no longer available to us, we gain the opportunity to reevaluate our strategy and explore other options that may still help us realize our long-term goals.
For example, the House of Representatives recently passed a version of President Biden’s Build Back Better bill—a sweeping piece of legislation that includes funding for pandemic relief, infrastructure, social services, and more. One piece of this legislation calls for an end to the so-called “backdoor Roth IRA conversion.”
According to a November 30, 2021, article by CNN, “Starting next year, the House-passed bill would prohibit all taxpayers from converting their after-tax contributions using this ‘backdoor’ conversion method to a Roth IRA.”
As of this writing, the House version of the Build Back Better bill has not passed the Senate or been signed into law. But even if it fails to become law, it brings up an interesting question: What would happen if one of our retirement options suddenly became unavailable, and where else can we look for ways to preserve or even grow our wealth?
A backdoor Roth IRA conversion can provide tax-free growth to those typically unable to contribute to Roth IRAs. That may soon change.
Broadly speaking, a Roth Individual Retirement Account (IRA) allows you to contribute after-tax dollars, which then grow tax-free and can be withdrawn tax-free once you retire with no required minimum distribution (RMD). By contrast, a traditional IRA allows you to make pretax contributions, but withdrawals are then taxed.
Currently, only those whose modified adjusted gross income is less than $144,000 ($214,000 if filing jointly) are allowed to contribute to a Roth IRA. However, a “back door” exists whereby high-income earners can still contribute indirectly to Roth IRAs by contributing to a traditional IRA and then immediately converting that traditional IRA to a Roth IRA. A similar conversion method can be used to put 401(k) funds into a Roth 401(k) account.
There are several benefits of putting money into a Roth IRA. According to a November 22, 2021, article by Investopedia, some may seek out this option to “save tens or even hundreds of thousands of dollars on taxes over the years.” Investopedia continues by saying that since Roth IRAs have no RMDs, “you can leave your money in your Roth for as long as you want, which means it can keep growing indefinitely.”
If the House-passed Build Back Better bill passes the Senate and is signed into law, it may remove some of your tax-deferred options when it comes to building your retirement portfolio. But don’t forget—whether this happens or not, you have many other IRA options to explore.
You have other ways to experience the benefits of an IRA.
If you’re looking for additional ways to experience the benefits of an IRA, one option you may wish to explore is a self-directed IRA. This type of IRA allows you to receive the same tax advantages as with a conventional IRA but throws open the doors of possibility when it comes to choosing your assets—and it allows you more direct control over your asset mix.
For example, with a traditional IRA, your custodian generally presents you with a limited number of assets to choose from, such as stocks, bonds, or exchange traded funds (ETFs). But with a self-directed IRA, you can include alternative assets like real estate, cryptocurrencies, or physical precious metals like gold and silver. Since you’re able to diversify with more assets (and more asset classes), this type of IRA may help you reduce your overall risk exposure and provide you additional opportunities for upside potential.
The popularity of self-directed IRAs has been growing. On August 14, 2021, Forbes wrote, “In less than 50 years, the self-directed IRA has become the most popular way for retirement savers to [move] their retirement funds into IRS-approved alternative asset[s]…. With Americans having over $35 trillion in total retirement funds, the future growth potential of the self-directed IRA industry is significant.”
We’ve seen some of this growth firsthand at U.S. Money Reserve. This past year, our IRA division was one of our organization’s fastest-growing sectors, with more and more of our clients looking to take greater control of their retirement strategy. But everyone’s financial situation is unique, and it’s important that you take the time to understand all your options so you can make educated decisions regarding your portfolio.
Many experts point to diversification as a key element of portfolio management.
It’s possible that with the passing of the Build Back Better bill, Americans may begin looking for new ways to save for retirement as well as new ways to experience the benefits of IRAs. And that’s not a bad thing—retirement is, after all, a long-term goal, and we may need to reexamine our strategies from time to time, explore alternative options, and make adjustments to our portfolios as our unique situations change.