President Obama recently released his budget proposal for 2015. The proposal included the following potential changes to investor retirement accounts:

Apply the required minimum distribution rule to Roth IRAs

Currently, there are two main reasons to invest in a Roth IRA: to pay taxes at your current rate in anticipation of being in a higher tax bracket in the future, and to invest in an account that does not require minimum distributions when the investor reaches age. . 70½. However, President Obama’s 2015 budget requires Roth accounts to be subject to the same RMD rules as other IRAs and 401k accounts.

This change would make Roth IRAs much less attractive to a good portion of the investment community. Additionally, the rule would drastically reduce the benefit for many people of converting their traditional retirement accounts to Roth accounts. Ultimately, this rule would essentially betray all investors who have already converted their accounts to Roth by taking away an existing profit.

Remove Stretch IRA

Non-spousal retirement account beneficiaries currently have the option of withdrawing funds within five years of the death of the original IRA owner or extending distributions from the IRA over their expected life. Obama’s proposal would eliminate the ability of non-spousal beneficiaries to stretch distributions over a period of more than five years.

If implemented, this change would have serious tax implications for individuals inheriting an IRA or 401k and dramatically reduce the value of tax-deferred accounts as estate planning tools.

Tax Benefit Limit for Retirement Account Contributions

Investors currently get a full tax deferral benefit on all contributions to retirement accounts. Under Obama’s proposal, the maximum tax benefit that would be allowed on retirement contributions would be 28%. Consequently, an investor in the 39.6% tax bracket could only deduct 28% and would still have to pay 11.6% tax (39.6% – 28%) on all contributions made.

Eliminate RMD for retirement accounts under $ 100k

Simply put, people whose tax-deferred accounts have a total value of less than $ 100k would no longer be subject to the required minimum distribution rules. This would allow retirees with less in their retirement accounts to take more advantage of the tax-deferral benefit that an IRA offers.

Retirement account value limiting new contributions

Under the new proposal, once the value of a person’s retirement account increased to a certain limit, no further contributions would be allowed. This limit would be determined by calculating the balloon payment that would be required to produce a 100% joint and survivor annuity of $ 210,000 after the investor’s 62nd birthday. Currently, this formula would indicate a limit of $ 3.2 million. This limit would be adjusted for inflation.

Proposal, not law …

Please note that these potential changes are currently only proposed and it is not certain that they will be implemented in law. In fact, with the exception of RMDs for Roth accounts, all of these suggested adjustments were proposed by Obama last year and none were approved by Congress. Consequently, history suggests that Obama may struggle to implement these changes. However, examining the proposals provides an idea of ​​the direction President Obama would like to take.

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