Backdoor Roths aren't the only casualty of the Democrats’ tax plan

If you are among the wealthy in this country, or maybe you're an aggressive saver, get ready to say goodbye to your backdoor Roth. One of the benefits to using a backdoor Roth maneuver is that you can contribute money into your traditional IRA and then convert it into a tax-free Roth. You'll have access to all these great features: earnings will grow without being taxed again as long as they are in retirement accounts; withdrawals from qualified withdrawal sites like 401ks or IRAs don’t incur any fees (or even taxes).

The Democrats' plan, however, would scale back Roth conversions, and completely eliminate the ability for the richest Americans to convert traditional IRAs into Roth IRAs by 2032. Right now, individuals with an income above $140,000 are not permitted to make Roth IRA contributions directly. The change would mean that wealthier Americans – individuals with a taxable income over $400,000 or couples filing jointly with taxable income over $450,000 – wouldn't be able go through the backdoor to make a conversion.

A related maneuver called the mega backdoor Roth IRA would be eliminated even sooner. This move allows employees in certain retirement plans make an after-tax contribution to their 401(k) that they then roll into a tax-protected Roth. That move would be eliminated by 2022 and apply to everyone, regardless of income level.

Additionally, entrepreneurs and their original investors will no longer enjoy a special type of equity known as qualified small business stock, or QSBS under the new tax code. QSBS allows employees and outside investors with stock in a startup to avoid capital gains tax on either $10 million in profits or 10 times their original investment, whichever is higher when they sell their stock. It’s an engine of wealth for entrepreneurs because the second bucket can far exceed $10 million. Instead, such people would avoid tax on only 50% of their stock. They would owe the proposed higher capital gains rate of 28.8%, which includes the 3.8% Obamacare surcharge, on the rest. The current rate, with the surcharge, is 23.8%.

The House’s tax-writing Ways & Means Committee approved the plan on Wednesday, Reuters reported, giving it a greater chance of passing in both the full House and the Senate — where Democrats have a razor-thin majority — before heading to Biden for his signature.

Ignored was Biden's hotly contested proposal to limit heirs' ability to avoid capital gains taxes when inheriting appreciated assets or property if they make $1 million or more. Bloomberg reported on Sept 14 that the top House Democrat overseeing tax policy said that this plan lacked sufficient support, "further dimming its chance" of becoming part of Biden’s 3 trillion dollar economic package. In its place came the surprise bodyslam to backdoor Roth conversions.