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November 5, 2021
Rollovers and Conversions to Roth IRAs and Designated
Roth Accounts: Proposed Changes in Budget Reconciliation
Introduction
Individuals can save for retirement through tax-advantaged
vehicles such as Individual Retirement Accounts (IRAs)
and qualified retirement plans (for instance, employer-
sponsored 401(k)s or defined benefit plans). Individuals
may be able to roll over savings in one type of qualified
plan, account, or IRA to another type subject to a number of
requirements. Section 138311 of H.R. 5376, as reported by
the House Committee on the Budget on November 3, 2021,
would modify certain rollover rules.
IRA Contributions and Withdrawals
IRAs are tax-advantaged investment accounts for retirement
savings. Congress has authorized two types of IRAs:
traditional and Roth. Eligible individuals may contribute to
their IRA(s) up to the IRA contribution limit ($6,000
[$7,000 for individuals age 50 and older] in 2021).
Traditional IRAs. Anyone with wage income can
contribute to a traditional IRA. Contributions to traditional
IRAs may be deductible from taxable income (i.e., they
reduce taxable income). Deductibility of traditional IRA
contributions is phased out based on adjusted gross income
(AGI), tax filing status, and household workplace pension
coverage. Individuals who cannot deduct part or all of their
traditional IRA contributions can make nondeductible
contributions.
* Deductible IRA contributions reduce taxable income.
Withdrawals of deductible contributions (and any
investment earnings) are included in taxable income.
* Nondeductible IRA contributions are not deductible
from taxable income. The portion of a withdrawal
attributable to the nondeductible contributions is not
included in taxable income. However, any investment
earnings that have accrued are included in taxable
income.
Roth IRAs. Individuals with AGI under specified limits
can contribute to a Roth IRA (e.g., a single filer with an
AGI of less than $140,000 in 2021).
* Roth IRA contributions are not deductible (i.e., they are
made from after-tax income). Qualified withdrawals
(which include contributions and any investment
earnings) from Roth IRAs are not included in taxable
income. Qualified withdrawals are those made (1) after
age 591, death, or disability and (2) from accounts that
have been held for at least five years.
Qualified Plan Contributions and Withdrawals
A qualified plan is an employer-sponsored retirement plan
that receives special tax treatment, such as a 401(k) plan, a
403(b) plan, a 457(b) plan, or a defined benefit (DB) plan.
Employees and/or employers make contributions to a
qualified plan. Plans may permit various types of
contributions.
* Pre-tax contributions lower an individual's taxable
income. Withdrawals of savings (i.e., contributions and
any investment earnings) attributable to pre-tax
contributions are included in taxable income.
* Designated Roth account contributions do not lower
taxable income. Qualified withdrawals from designated
Roth accounts are not included in taxable income.
* After-tax (non-Roth) contributions do not lower taxable
income. Withdrawals attributable to after-tax (non-Roth)
contributions are not included in taxable income,
whereas investment earnings attributable to those
contributions are included in taxable income.
An individual's pre-tax and designated Roth account
contributions (called elective deferrals) cannot exceed
specified limits ($19,500 [$26,000 for individuals age 50
and older] in 2021). After-tax (non-Roth) contributions are
not subject to the elective deferral limit. However, total
contributions (which include elective deferrals, employer
contributions, and any after-tax [non-Roth] contributions)
cannot exceed specified limits ($58,000 [$64,500 for
individuals age 50 and older] in 2021). After-tax (non-
Roth) contributions are typically made after an individual
has already contributed the maximum amount of elective
deferrals.
Rollovers and Conversions to Roth IRAs
and Designated Roth Accounts
Individuals can preserve the tax benefits of their retirement
savings through a rollover. A rollover is a transfer of a
portion or all of the savings from one qualified retirement
plan, account, or IRA to another plan, account, or IRA. In
general, a conversion is a type of rollover that occurs when
savings are rolled over from a traditional IRA, qualified
plan, or account (which includes any after-tax [non-Roth]
savings) to a Roth IRA or designated Roth account.
Prior to 2010, conversions to Roth IRAs were limited to
taxpayers with AGI of less than $100,000 (to prevent high-
income taxpayers from indirectly funding Roth IRAs). The
Tax Increase Prevention and Reconciliation Act of 2005
(TIPRA; P.L. 109-222) eliminated the AGI limit for Roth
conversions beginning in 2010. As a result, individuals
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