Monday, July 16, 2018
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.