Paul L. Caron

Monday, July 16, 2018

IRS Gives Green Light To Back-Door Roth IRAs For High-Income Taxpayers

Forbes, IRS Unlocks The 'Door' For High-Income Savers:

For years, there’s been a debate raging in the financial planning community surrounding something that’s colloquially become known as “The Back-Door Roth IRA.” Some practitioners (including myself) have been advocates of the planning strategy, which involves a two-step process that effectively enables certain high-income taxpayers to skirt the Roth IRA contribution income limits, viewing it as a clever technique to make the most of nonsensical rules. Other practitioners, however, have preached caution, and have largely encouraged their clients to avoid making such transactions out of concern that the IRS could disallow the move thanks to something known as “the step-transaction doctrine.”

Despite the uncertainty surrounding the somewhat popular strategy, the IRS had been relatively tight-lipped as to its official view on the matter… or at least it had been until this past Tuesday. Earlier this week, on a July 10th Tax Talk Today webcast, Donald Kieffer Jr., a tax law specialist with the IRS’s Tax-Exempt and Government Entities Division, gave the Back-Door Roth IRA it’s biggest vote of confidence yet. Here’s what Kieffer had to say about the strategy:

“I think the IRS’s only caution would be whenever we see words like ‘back door’ or ‘workaround’ or other step transactions that are putatively enabling a way to get around limits - especially statutory contribution limits - you generally find the IRS is not happy and prepared to challenge those,” Kieffer said. “But in this one that we’re talking about, it’s allowed under the law.” (emphasis added)

Kieffer’s comments comes on the heels of another indication this strategy is legitimate: four footnotes in the Congressional “conference report” describing the December 2017 tax law also indicated the Back-Door Roth IRA is allowed.  So there you have it. For all intents and purposes, as a practical matter, the case of the Back-Door Roth IRA is officially closed.

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Brian, you're right of course, but your complaint should be directed to Congress, not the IRS. The IRS must respect the law that Congress gave us for the same reason that taxpayers may rely on it. I agree that Congress should step in and either remove the income limit (my preference) or create a clear waiting period for conversions, but until it does the IRS has little choice here.

Posted by: Mike Petrik | Jul 18, 2018 4:10:34 AM

So if the IRS is OK with the back-door Roth IRA, why not eliminate the extra work for taxpayers and custodians by removing the income limit for contributions? This is another example as to why people are frustrated with government---because it complicates what should be a simple process for no good reason.

Posted by: Brian | Jul 17, 2018 9:14:15 AM

Professor Beale -- your silly gratuitous remark about Scalia notwithstanding, isn't it true that it is pretty clear that Congress intended Roth conversions to apply to people at all income levels? If so, then how exactly does a court reconcile the two competing intents? Should the court create a waiting period for high income taxpayers? If so, what should it be? Three years? A month? Next taxable year? Perhaps they should just ask you? I would go with the plain language of the Code myself, though I acknowledge you might not view that as a "reasonable" method of interpretation.

Posted by: Mike Petrik | Jul 17, 2018 4:43:16 AM

In addition to such a comment being non-authoritative, it's very likely that the IRS speaker included one of those "I'm speaking only for myself" disclaimers.

Posted by: Tuphat | Jul 16, 2018 5:09:04 PM

Originalists like Scalia used to say that legislative history about congressional intent can't even be considered. And while most more reasonable interpretators of law would consider legislative history for its ability to cast light on the meaning and purpose of a statute, it certainly doesn't mean that something inserted into a conference report by staffers to mollify their politicos rich constituents' ire about not being able to avoid even more tax just because they earn too much should be accepted as just fine. A court (and the IRS) should look at the intent of the law to limit Roth IRAs to people with certain lower income levels: if that is the approach taken, the step transaction doctrine should clearly apply to make this "back door" get thrown out the back door.

Posted by: Linda Beale | Jul 16, 2018 3:05:09 PM