PRESIDENT’S FINAL BUDGET ATTACKS RETIREMENT TAX PLANNING

President Obama has again threatened retirement tax breaks as evidenced   by his Fiscal Year 2017 Budget proposals recently released. Although probably most (if not all) provisions will fail to be passed by Congress, it paints a clear picture what the administration would like to do and it also tells taxpayers what planning to consider. Although there were numerous proposals regarding retirement planning that could affect your pocketbook, here are a few that I think are the most important:

  1. Kill The Stretch IRA.

Presently, non-spouse beneficiaries of IRAs have the option to stretch IRAs that they inherit over their life expectancy. Thus, if one inherited an IRA worth $40k and such non-spouse beneficiary had a 40 year life expectancy, then the beneficiary might be required to take approximately $1k per year thus allowing the IRA to grow tax deferred. Under the President’s proposal, it would be mandatory for non-spouse beneficiaries (other than those disabled, chronically ill, minors and account owners who are less than 10 years younger than the retirement account owner) to empty such inherited IRAs within five years. Widows and widowers of the original owner would still be permitted to stretch withdrawals over their life expectancies.

  1. Eliminate Back-Door Roth IRAs.

The President has proposed that you can no longer contribute to a Roth IRA with after-tax money held in a traditional IRA or employer-sponsored retirement plan. Since your income must be limited (no more than $117,000 and $132,00 for a single person and between $184,000 and $194,000 for couples filing jointly) before you can contribute to a Roth IRA, one common tactic for those whose income exceeds that limit is to contribute to a non-deductible traditional IRA and then convert this to a Roth. This proposal would kill back-door Roths.

  1. Require Roth IRA Holders To Follow RMD Rules.

The President has also proposed that holders of Roth IRAs make required minimum distributions after you turn 70½ - like those who have traditional IRAs. If you are already over 70½, this would not be applicable. However, this would still seem to be unfair to those who contributed to Roth IRAs thinking that they would not have to make such withdrawals. Of course, the present basic premise of Roth IRAs is to pay the tax on the amount contributed and funds could grow without taxation as long as the funds are held in the Roth. This proposal of a forced withdrawal would mean that although there would be no tax on the withdrawal, the earnings made on the forced withdrawals would be subject to income taxation. However, the proposal eliminates required minimum distributions on any IRA with less than $100,000.

  1. Retirement Saving Contributions Limited On Larger IRAs.

Under this proposal, you can’t make additional contributions once your account is greater than the cap – initially to be approximately $3.4 million. The problem with this proposal is that one could have an amount that is greater than the cap and be prohibited from additional contributions, but then the assets held in the IRA could go lower after the IRA was prohibited from making contributions. This proposal fails to take bear markets into account.

  1. Roth Contributions After Age 70.

At the present time, you cannot make contributions to a traditional IRA after the owner reaches 70½ years of age. However, as long as you still have earned income, you can still contribute (up to $6,500 if over age 50) in a Roth IRA. This proposal would no longer allow older workers to make such contributions.

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