By Sarah Brenner, JD
Director of Retirement Education
Today is Inauguration Day. A new administration has arrived. We also have a new Congress. With the arrival of newly elected officials, many will have hopes of legislative change. When it comes to retirement accounts, one rule that the new Congress should consider changing immediately is the income limit rule that applies to Roth IRA contributions. This pointless rule should be eliminated.
The Roth IRA Income Limits
The Roth IRA tax year contribution limit for 2024 and 2025 is $7,000. Those who are age 50 or older by the end of the year can contribute $8,000. However, not everyone is eligible to contribute to a Roth IRA. Congress has placed income restrictions on Roth contributions. Here are the limits on modified adjusted gross income for Roth tax year contributions:
| Single or Head |
| Year Married/Joint of Household |
| 2023 $218,000 – $228,000 $138,000 – $153,000 |
| 2024 $230,000 – $240,000 $146,000 – $161,000 |
| 2025 $236,000 – $246,000 $150,000 – $165,000 |
Why Congress Should Do Away with Roth IRA Income Limits
There are several reasons why the new Congress should make the Roth IRA contribution income limits history.
The backdoor is wide open. The Roth IRA contribution limits are not stopping high income savers. There is an easy workaround. You can simply make a nondeductible traditional IRA contribution (no income limits apply) and then convert it to a Roth IRA (no income limits apply).
While there may have been concerns about this strategy years ago, there has been no evidence that either Congress or the IRS is doing anything to prevent these transactions. In fact, Congress indirectly “blessed” the backdoor Roth IRA conversion in the committee report to the Tax Cuts and Jobs Act.
The only people not rushing through the backdoor are those individuals with existing taxable traditional, SEP or SIMPLE funds. They will get stuck with a tax bill on the conversion due to the complicated pro-rata formula rules that apply to conversions. Even these unlucky individuals can still do a backdoor Roth IRA as long as they are willing to pay the taxes on the conversion.
Unnecessary complications. While the backdoor may be a way to fund a Roth IRA, it does complicate things unnecessarily. You must make a contribution to a traditional IRA. If you do not have one, it must be established. Then, when the contribution is made, it must be reported as nondeductible on Form 8606. Then, a conversion must be done and reported by both you and your IRA custodian. This must happen each year a backdoor Roth IRA conversion is done. That’s a lot of work and potential for mistakes. If the new Congress is serious about doing away with red tape and simplifying unnecessary rules, getting rid of the income limits on Roth contributions would certainly seem to be a good place to start. Imagine how much easier it would be to just contribute directly to a Roth IRA.
No other Roth saving strategies have income limits. Over the years since the Roth IRA became a reality back in 1998, we have seen Congress establish a long list of other Roth options. None of them have income limits like tax-year Roth IRA contributions do. Congress did away with the income limits for Roth IRA conversions in 2010. Roth 401(k) and Roth SEP and SIMPLE IRA contributions are available to all regardless of income level. In fact, next year some high earners will be forced to make their catch-up plan contributions on a Roth basis instead of as a pre-tax salary deferral. With all these Roth options available to high income savers, it makes no sense to keep the Roth IRA contribution limits.
Roth accounts raise revenue. Congress loves Roth accounts because they bring in immediate revenue since they are funded with after-tax dollars. So, why not allow high income individuals to save for retirement by making direct Roth IRA contributions? This will generate more current revenue and allow more savers to work more easily towards a secure retirement.
The income limits don’t work. If the goal of the income limits on Roth contributions is to keep high income individuals from taking advantage of the Roth IRA strategy, it has not worked. A few years ago, the story of one tech billionaire’s large Roth IRA made headlines. According to reports, his Roth IRA was started with a tax year contribution. Twenty-two years later, it was worth five billion dollars. The income limits did not prevent one of the richest men in the world from amassing a fortune in a Roth IRA. They serve no purpose and Congress should do away with them now!
https://irahelp.com/slottreport/one-roth-ira-rule-congress-should-do-away-with-now/