2016 proposed budget implications for young savers

US Capitol Building

AJ & KJ: Last week the President submitted his proposed budget changes and the implications for retirement accounts. Were the proposed changes to be approved, there are hefty implications for young savers and we’re covering a few that are especially impactful for young savers below. While the point of the article is not at all to take sides in either direction, it is merely to point out some of the proposed changes.

We all plan for our savings and our future, but one of the most uncertain aspects of planning for the long-term is the tax code. It inevitably changes from time to time, and in many cases can be quite sweeping in the changes brought. It’s important to take each proposal below, along with other ones you might read, and understand that the tax laws are likely to change at some point. Status quo just doesn’t exist in this area of our lives!

1. Limit Roth conversion to pre-tax dollars.
Essentially, those fortunate enough from an income standpoint (often used for married couples with combined incomes greater than $181k annually for 2014) who have made contributions to traditional IRAs and have then converted those contributions to a Roth due to exceeding the $181k limit for direct Roth contributions would essentially have their tax benefits eliminated.

This method (often called the “back door Roth IRA contribution”) hasn’t even been around for all that long (since people prior to 2010 couldn’t even convert to a Roth), but this strategy could be closing nonetheless, which has far-reaching implications for couples earning more than $181k annually and contributing in this way.

2. “Harmonize” the RMD rules for Roth IRAs with the RMD rules for other retirement accounts.
This is a serious game changer. This provision would require that distributions from Roth IRAs be taken upon turning 70 1/2, the same as traditional IRAs. This would make us very, very unhappy people. One of the strong benefits of a Roth IRA as part of an overall retirement picture is to not HAVE to take funds out at any required point. Thus, it makes very, very good long-term monies that could be used in very late stages of retirement. Not so much were this to be put in place! Wah wah.

3. Create a 28% tax benefit for contributions to retirement accounts.
If you are in the 28% income tax bracket (or lower), this provision would not directly impact you. However, those who are in a higher tax bracket wouldn’t receive a full tax deduction for contributions or deferrals into a retirement plan. No thank you.

4. Establish a cap on retirement saving prohibiting any additional contributions.
This proposal essentially favors those who save LESS than whatever the established cap on retirement savings is. We’re REALLY not fans of this (even though the time this could even be reached is a long, long way off). We’re pro-savings, especially at a very early point, so this disallows people from saving as much as possible within tax-favored accounts. Sure, the limits proposed are quite high, but still, why create a stigma about accumulating “too much” in a retirement account? Don’t punish those that have been fortunate enough to accumulate such sums!

We’re generally pro-savings, pro-tax benefit planning people, so while these are simply provisions at this point and we won’t know for many months whether they are to become part of our reality, it’s incredibly important to us that we be allowed to maximize our retirement savings without the rules of the game changing mid-stream.

Ultimately, most of these provisions mean more complexity, more nuances, more limitations, etc. that make it all the more cumbersome to navigate your personal finances. Hopefully many of these (as they have been in the past) are nixed and don’t make it to the tax code, but the provisions proposed (these in addition to NUMEROUS others) are just good examples that the tax code is in no way permanent. All you can do is plan the best for the rules you know now, and then adjust course as those changes are thrown your way over the years.

For more information about the budget proposals, read here.

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