President Obama recently released his Fiscal Year 2017 federal budget proposal (download the pdf of the budget proposal here). As in past years, there are strong recommendations included. Now these proposals are NOT new, and we could strongly argue how unlikely any are to pass in 2016 since this is an election year. However, the recurrence of these proposals may be an indication that changes could occur in the near future. For example, two Social Security claiming strategies that had been targeted by the President were changed by legislation late in 2015.
Let’s discuss three of the President’s proposals today.
First, he is pushing to stop the so-called “IRA stretch” for many beneficiaries. Upon inheriting an IRA, this “stretch” allows a beneficiary to continue income tax deferral by taking relatively small withdrawals from the account over his life expectancy. However, the President is proposing non-spouse beneficiaries be required to withdraw the entire account within approximately 5 years of inheriting it. In many cases, this may result in a substantial acceleration of income tax due from beneficiaries.
Another proposal is to limit Roth IRA conversions to pre-tax dollars only. Since 2010, many individuals with income too high to allow Roth IRA contributions have executed a strategy known as “back door Roth IRA contributions.” Regardless of his high income, someone with no other IRA balances would make a non-deductible Traditional IRA contribution and subsequently convert these dollars to a Roth IRA tax-free. This has been used by high income earners as a “back door” way of side stepping the rules and therefore funding a Roth IRA. The President wants to close this loophole.
Third, it’s proposed that Roth IRAs be subject to Required Minimum Distributions (RMDs) starting at age 70 ½ – similar to Traditional IRAs. This is huge as one benefit of a Roth IRA is that neither the account owner nor the surviving spouse is required to take withdrawals during lifetime. This allows the Roth IRA to grow tax-free over a long period of time as a tax-free legacy to pass along to heirs. In combination with the possible elimination of the IRA stretch I described earlier, this would greatly reduce the legacy benefits of a Roth IRA.
There are other proposals, but today I chose to highlight only three.
No one knows the future, but everyone can prepare for it. Are you partnering with a team to help with your financial life planning?
Payne Wealth Partners and Keystone Financial Consulting are purposely built to provide clarity, confidence and peace of mind through a planning-centric solution relevant to you. Let’s start a conversation about wealth management that’s focused on planning for the past, current, and future changes and ultimately what is most important to you.
Published: February 17, 2016
Author: Terry Prather, CFP®, ChFC®, MSFS
Phone: (812) 602-6307
Share your thoughts by tweeting to @PayneWealth or follow us for more useful info!The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.