Build Back Better Impact on FIRE for FAANG Workers
The Proposed Build Back Better bill has passed the house and now goes to the senate.
The House just passed the Build Back Better bill. It has major implications on the FIRE focused tech worker. The $1.75 trillion bill covers a tremendous amount of nuanced social, climate, and tax policy within H.R. 5376’s nearly 2,500 pages. Permanent Paid Leave, Universal Pre-K, Child Tax Credits, a huge litany of climate change focused spending and much more. I will just be covering a small number of items that would impact the personal finances of the typical FAANG tech worker. It is important to note that the bill still needs to pass the evenly split Senate before ever seeing the light of day. It is very likely the Senate will seek to change a few things which will send thing back to the House so take all of this as potential impacts until we know more.
IF the House Bill Passes:
In aggregate the Tax Policy Center estimates “Looking at direct taxes only, fewer than 0.1 percent of those making $500,000 or less would pay more in taxes than under current law.” That isn't to say there are not major changes that would impact those planning for FIRE.
Death of the Mega Backdoor Roth
The house bill completely eliminates the ability to convert any after-tax contributions in a 401k into a Roth. Effectively killing any value of contributing beyond the traditional $20,500 in 2021. There are no income limits here, the house bill removes the mega backdoor for everyone.
Limited Backdoor Roth for High Earners
Tech workers earning more than $140,000 have already been unable to contribute $6,000 directly into a Roth IRA. However there was a work around where you contribute $6,000 into a traditional IRA and then roll that contribution into a Roth, hence the name “Backdoor” roth. The house bill removes the ability to do this if you earn >$400k as a single filer or $450k married filing jointly.
Overall Limits on New Contributions on Very Large Balances
If you happen to have >$10,000,000 across your Roth & Traditional including workplace accounts you will be prohibited from adding any new contributions. This restriction would also prevent you from contributing to your 401k once you hit the $10M mark.
Required Withdraws Regardless of Age on Very Large Balances
Another potential complication for those with >$10M balance are new provisions forcing withdraws annually on amounts above $10M thus incurring additional taxes. The specific withdraw requirements are a bit complicated so i’ll leave the analysis for the accountants. The one intriguing addition here is that the required withdraws only impact those earning >$400k single or $450k married. Seems to me like a good extra incentive to push someone to FATFIRE earlier to avoid the potential tax implications. This provision would only start in 2029 so there would be plenty of time to plan around this.
SALT Limit Increase
One of the major changes from the Trump tax cuts was the drastic cut to deductions available against State and Local Taxes (SALT). This had large implications for those in states like California and New York as well as those with large property tax bills. The current house bill will increase the limit from $10k to $80k. This is one of the major changes to the bill that lead me to believe there will be changes in the Senate. Providing tax breaks for high income earners on the Coasts tends not to be very popular particularly when the democrats will need every single vote for this to pass.
“those making between $175,00 and $250,000 would get a tax cut of just over $400 or about 0.2 percent of after-tax income. By contrast, the higher SALT cap would boost after-tax incomes by 1.2 percent for those making between about $370,000 and $870,000 (the 95th to 99th percentile).”
Electric Car Credit
As part of the climate focused initiatives are a variety of tax credits. Based on my recollection of the Facebook parking lot the credits on eclectic car purchases would be a popular one. Gone would be the $7,500 credit which would be swapped for a larger $12,500 credit. Don’t go and put in your Tesla order just yet though. Only cars using union labor in their US factories would qualify for the full credit amount (non-union factories reduce the credit by $4,500). In addition there are new income and car cost limits. Single earners with incomes >$250k would not qualify nor would dual income households earning >$500k (interesting note there is a limit for single income households of $375k). Additionally only sedans/small cars <$55k and SUVs <$80k would qualify.
Healthcare Focused Subsidies and Limits
This shouldn’t impact those currently employed but for those on the verge of FIRE the extension of ACA subsidies and premium offsets will be welcome news. There are also provisions aimed at reducing prescription drug pricing.
Prekindergarten and Child Care
Another category of spending that would benefit those with children by way of increased teacher training, child care facilities and subsidies primarily for those making less than 250% of their state's median income.
What I Would do If This Passes
If the bill as proposed passes the senate before 2021 ends many of the changes would go into effect starting immediately January 1st 2022. I would make sure I have already done all my planned roll overs in 2021. This includes back door roth ira as well as ensuring that any after-tax 401k contributions are rolled over before the end of the year. Note: Facebook’s after-tax plan has a setting which automatically completes the in-plan roll over so this isn’t necessary. However this isn’t a feature in every plan I have seen.
In 2022 if the bill still has not passed I would plan on front-loading as much of my mega backdoor and backdoor after-tax contributions as possible. This means increasing my after-tax contributions to the maximum allowed by my employer with hopes to max out prior to any new laws can take effect. It is possible that the law would be retroactive however it isn’t clear to me whether this would apply towards contributions that have already been rolled over. I tend to front load all my contributions anyway so there wouldn’t be any major changes to my approach. If you normally spread out your contributions over the year it may be worth considering re-evaluating your approach.
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