New Tax Bill Bans Conversion of After-Tax IRA Contributions to Roth IRAs
If certain conditions are met, a Roth IRA is an Individual Retirement Account (IRA) that allows qualified withdrawals to be made tax-free without incurring additional tax. According to Investopedia, it was established in 1997 and is named after William Roth, a former senator from Delaware.
Retirement with IRA
Traditional IRAs and Roth IRAs are very similar, but the main difference is that Roth IRAs are taxed differently. Roth IRA contributions are not tax deductible because they are made with after-tax money. The money is tax free once you start withdrawing it. When you contribute to a traditional IRA with pre-tax dollars, you usually receive a tax deduction and pay income tax when you withdraw the money from the account in retirement.
Saving for retirement with an IRA is very common; in fact, over a third of all households in the United States currently have an IRA. On the other hand, the IRS updates the eligibility criteria for the IRA on an annual basis to account for inflation, in accordance with the AARP. Such changes will have a significant impact on who can contribute to a Roth IRA and who can deduct their traditional IRA contributions from their taxable income starting in 2022.
Also read: Americans have one month left to claim payments over $ 1,400
The new bill
According to CNBC, retirement accounts that authorize large bequests to the rich will no longer be available to the majority of Americans starting next year. On Thursday, it was announced that the Senate had passed legislation to remove the “Stretch IRA,” a widely used financial planning strategy.
No one will be able to take advantage of the conversion provisions of the current tax law after the year is over, not just those who earn more than $ 400,000 a year. The legislation stipulated that all after-tax employee contributions to qualifying plans and all after-tax IRA contributions, regardless of income level, cannot be converted to Roth upon distributions, transfers and contributions made after December 31, 2021. , as per MarketWatch.
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