Backdoor Roth IRA Opportunities Still Available After TCJA

by | May 15, 2019 | Blog | 0 comments

Backdoor Roth IRA Opportunities Still Available After TCJA

Good news. The Tax Cuts and Jobs Act (TCJA) did not harm the backdoor Roth strategy.

As you likely know, the Roth IRA is a terrific way to grow your wealth with a minimum tax downside because you pay the taxes up front and then, with the proper holding period, pay no taxes after that.

But if you earn too much, you’re completely barred from contributing to a Roth IRA unless you can use the backdoor Roth technique, which involves making a nondeductible contribution to a traditional IRA and then rolling that money into a Roth.

The backdoor Roth strategy has been around for a good nine years, and it has experienced no trouble that we are aware of, so we think it’s a good strategy. We also like the recent notations in the legislative history and the comments from the IRS spokesperson that show approval of the strategy.

Keep in mind that with some planning, you can avoid any taxes on the rollover. For example, if you have an existing traditional IRA, you can move those monies to your qualified plan to avoid having the backdoor strategy trigger some taxes. And if you have no traditional IRA, the nondeductible contribution to the traditional IRA and the subsequent rollover to the Roth IRA triggers no taxes.

New IRS FAQs on Section 199A

On April 11, likely after you filed your tax return, the IRS updated its Section 199A frequently asked questions (FAQs) by increasing the number of questions and answers from 12 to 33. The IRS often publishes FAQs on its website to help educate you on various tax law provisions. Section 199A is no different: the IRS has been updating its FAQ website with additional questions and answers on the newly qualified business income (QBI) tax deduction.

We noted three of the FAQs that help fill in some holes in the final Section 199A regulations but will cause problems for many taxpayers. In fact, there will be taxpayers who will need to file amended tax returns because of the FAQs.

FAQ 29: QBI Subtractions for Partnerships

In this FAQ on partnerships, the IRS hints at the following:

  • Unreimbursed partnership expenses and business interest expenses reduce QBI in some, if not all, circumstances.
  • Traditional IRA contributions based on self-employment income don’t reduce QBI (since the IRS didn’t include them), while SEP, SIMPLE, and qualified plan deductions do reduce QBI.

FAQ 32: QBI in Final vs. Proposed Regulations

In FAQ 32, the IRS clearly states that the definition of QBI is the same in both the proposed and the final regulations. Since the definition was clarified in the final regulations, this was a surprise to many.

And what this means is that you reduce QBI by the self-employed health insurance deduction, the one-half of self-employment tax deduction, and the qualified retirement plan deductions.

FAQ 33 Has to Be Wrong

FAQ 33 states that an S corporation shareholder who owns more than 2 percent may have to reduce QBI at both the entity (S corporation) and the shareholder (1040 tax return) levels.

We don’t agree with the double subtraction indicated in IRS FAQ 33, for three reasons:

  1. The final regulations state that you reduce QBI “to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction.” Unlike the proprietorship, the S corporation reduces its business income by reimbursing or paying for the health insurance that it puts on the more than 2 percent shareholder’s W-2.
  2. Under Notice 2008-1, the self-employed health insurance deduction for the 2 percent S corporation shareholder requires that you include the insurance cost as shareholder wages. The wages reduce QBI.
  3. And income from the trade or business of being an employee is not QBI.

Website Is Not an Authority

If you don’t like the positions taken on the IRS’s FAQ website, then there’s one silver lining: FAQs don’t constitute authority for tax return positions.

MORE ARTICLES FROM OUR BLOG

The 2018 tax filing season is in full swing

The 2018 tax filing season is in full swing, which means most CPA’s don’t see family, friends, or daylight until sometime after April. The big focus this year has been on tax refunds, which were expected to be quite a bit different this year due to the tax changes...

Cost segregation

Dear GMP CPA Client: Cost segregation is the magic sauce that breaks your real property into its components and some of these components can depreciate much faster than the typical overall standard 27.5 or 39 year periods. This magic sauce is brought you courtesy of a...

2019 – Happy New Year

Welcome to 2019! We start the year off a little ominously; a partial government shutdown, looming international trade issues, and a rollercoaster stock market. All of these trending topics seem to make 2019 seem a little too much like 2009. And with the start of a new...

Commercial leasing the greater Charlotte area

GMP CPA serves a diverse group of clients and yet they all share one common business expense: rent. Some clients pay themselves rent (as the landlord) and other clients pay rent to someone else (if you don’t pay any rent, good for you!) As the economy picks up steam...

Home office deduction – walkthrough by GP CPA

Dear Client, The home office deduction is rather limited for your tax situation (and most people other taxpayers), especially in the trade-off between S-corp and schedule C.  The Schedule C offers better home office deductions, but the overall tax bill is...
Tina Simmons
Tina Simmons
13:38 17 May 19
This team is dedicated to their clients and committed to understanding your business and sharing their knowledge to help you succeed. I love working with these folks, they take the worry and uncertainty out of accounting and taxes!read more
Bravo4 Autowerks
Bravo4 Autowerks
12:55 08 May 19
Gary and his team have been fantastic for me and my business. They respond well to all my questions, are very helpful and of course keep my financials in order. Highly recommended.read more
Queen City Newborn Care
Queen City Newborn Care
15:57 02 Apr 19
I was drowning before I met Justin. He totally transformed how I run my small business and has gotten me organized in ways I didn't even know were possible. I am so grateful for his advice and suggestions! This company is worth every penny.read more
Dennis Bloomberg
Dennis Bloomberg
16:01 26 Mar 19
Unfortunately, I found GMP when my mother passed. She had a trust set up and I had no experience with one. I received excellent advice prior to filing taxes, that allow for the transfer of assets with little tax implication. The tax process was simple for me, Justin took over once he had details and cleared up all question from filing our taxes. Thank you for a job well done!read more
Natalie Knight
Natalie Knight
15:35 21 Nov 18
Prusiensky CPA is up to date on technology. They handcraft a platform that works best for your company's accounting services. We really appreciate how hands on and quick their team is when replaying to any type of correspondence. Simply put, they care and want your company to succeed.read more
Ashlyn Lelej
Ashlyn Lelej
14:39 21 Nov 18
I highly recommend Justin at Prusiensky, CPA for all of your accounting and tax needs. I've been a client for over two years, and have been consistently impressed with their dedication to helping my business grow and be financially successful. His advice is invaluable. Thank you!read more
Bobby Nguyen
Bobby Nguyen
22:23 20 Nov 18
My partner and I started our very first small business last year. Justin has been a blessing to us. Being new at all of this, we didn’t understand much of how business taxes work. Justin explained and answer all of questions that we have. He took care of everything for us throughout the year and have made life so much easier for us. I couldn’t have asked for a better CPA. Highly recommended!read more
Next Reviews

CATEGORIES

TCJA Allows Bonus Depreciation on Purchase of Leased Vehicle
Xero and electronic payment processing options (PayPal, Stripe, IntegraPay, Square, Plooto)