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We have cautiously broached the backdoor Roth contribution strategy with many of our clients over the years and a fair number have taken advantage of it. The primary concern has been whether the IRS would impose the Step Transaction Doctrine, which is the legal principle that a series of related steps in a transaction should be taxed based on the overall economic nature of the transaction, not simply based on the separate individual steps. The concern was that the IRS could use this doctrine to invalidate the conversion by treating it as an impermissible Roth contribution. As a result, we cautioned clients that if they decided to employ the strategy, they should consider waiting on the conversion step for a period of time so as to possibly improve the chances of the Step Transaction Doctrine not being imposed.
The good news is that the Tax Cuts and Jobs Act appears to put any concerns to rest by confirming that the backdoor Roth is a permissible strategy. There are several references to this strategy included in Congress’ Conference Committee report that accompanies the new law including the statement, “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.”
We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action. We’re here and happy to help – contact Beaird Harris today.
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