Populist Congress Mulls IRA Caps, Scrapping Backdoor Roths
As the GOP-led Congress gears up for the full-court press needed to pass President-elect Trump’s expanded version of his 2017 tax cuts, lawmakers are once again eyeing income caps on individual retirement accounts (IRAs) and the elimination of the so-called backdoor Roth IRA to raise revenue to pay for the cuts, according to Aliya Robinson, director of congressional affairs at T. Rowe Price, who spoke at a briefing on retirement policy Wednesday.
While the proposals are sponsored by Democrats, they are still on the table because of the Republican party’s populist push to eliminate tax shelters for the wealthy while benefiting the middle class, Robinson said.
Normally you wouldn’t have the minority party’s proposals under consideration in a GOP-led Congress, “but because this Republican party has more of a populist bent, there are two Democratic proposals still on the table,” she said. “The first one being an income cap on IRAs and the second being the elimination of the backdoor Roth. Both of these provisions are perceived as loopholes for the wealthy, and so I think with this particular Republican party there could be incentives to look at [the elimination] of these provisions as providing additional help for the middle class and getting rid of these perceived loopholes for the wealthy.”
Since 2021, Democrats have been pushing to limit so-called backdoor Roths and tax IRAs with more than $10 million, which they hoped to subject to required withdrawals. They sought to use the revenue savings from these changes to finance President Biden’s failed $1.75 trillion “Build Back Better” plan. Backdoor Roth IRAs benefit high-income earners, permitting them to sidestep Roth IRA income tax limits by paying taxes to convert a traditional IRA into a Roth, where retirement savings can grow tax free and are no longer subject to required minimum distributions. The bill sought to eliminate backdoor IRAs for single filers with taxable income greater than $400,000 and married taxpayers filing jointly with income greater than $450,000.
Democrats have also attempted to push for provisions that would “Rothify” all retirement plan contributions—eliminating the up-front tax-deduction on all contributions, but allowing assets to accumulate and be withdrawn tax free—but the move has been renounced by President Trump himself, Robinson said.
“I think the amount of money involved is too high for this not to be part of the conversation in 2025,” Robinson said. “We might not get to the same point as we got to during the previous administration where we were talking about completely changing the system, but I definitely think there will be suggestions for Rothifying part of the system or different pieces of it. As we’ve seen with different legislation over the past decade, every retirement legislation has included additional Roth provisions. I fully anticipate we’ll be having these discussions about [Roths] again,” she added.
That still leaves Congress to figure out how to pay the bill for a very expensive extension of the 2017 tax cuts, made pricier with the additional provisions Trump promised during his campaign—including a corporate tax rate that would be lowered from 21% to 15%; the ending of taxation on tips, overtime pay and Social Security benefits; and an increase in the cap on state and local tax (SALT) deductions. All told, extending Trump’s 2017 tax law would add $4.6 trillion to the national debt over the next decade, according to the Congressional Budget Office.
To pay for the tax cuts, Republicans have also proposed their own revenue raisers, according to Robinson. These include capping employer deductions for employee benefits; the elimination of catch-up contributions for high-income employees in employer-sponsored plans; the elimination of special 403(b) catch-up and governmental 457(b) catch-up contributions; a prohibition of post-employment 403(b) contributions; an extension of the 10% early distribution penalty to 457(b) plans; and the end of nonqualified deferred compensation, which pushes compensation back into later years.
T. Rowe Price executives expect the retirement industry lobby to roar into gear to attempt to block such moves.
Michael Davis, head of global retirement strategy at T. Rowe Price, also commented during the policy briefing. “As a firm we have been involved in those discussions as part of a broader aggregation of firms that are concerned about these kinds of things and the deleterious impact they can have,” he said.