The Winds of Change for Roth IRAs
Published on August 7, 2014
Roth IRAs are a good way to save for retirement. However, President Obama’s recent 2015 budget proposal includes proposed changes to Roth IRAs that may make them less appealing and less attractive for investors. The good news is that most of these proposals are not new; they have been included in prior budgets but none have been adopted. Nevertheless, it is important to consider when planning your long-term retirement savings plans since the winds can change.
If President Obama’s 2015 budget proposal is any indication of what the future may hold, Roth IRAs may end up having a required minimum distribution in the future, which they currently do not have. This would eradicate one of the main reasons many people contribute or convert to Roth IRAs in the first place. For some investors, Roth IRAs have great estate-planning benefits.
Key retirement account provisions in the budget:
- Required minimum distribution (RMD) – Currently, if you have a Traditional IRA, you have to start taking minimum distributions when you reach the age 70 ½. With a Roth IRA, there is no RMD. However, the Obama budget would impose the same RMD rules on Roth IRAs. Essentially this would force retirees to withdraw tax-free money from their accounts even if they don’t need it. The idea behind the change is to harmonize the distribution rules across retirement accounts.
- Maximum benefit for retirement fund contributions – The maximum tax deduction for making a contribution to a defined contribution retirement plan such as an IRA or 401 (k) would be limited to 28%. Individuals in a tax bracket higher than 28% would be adversely affected, resulting in significant tax costs.
- Mandatory 5-year rule for non-spouse beneficiaries – In essence, this would eliminate the stretch IRA. It would force non-spouse beneficiaries to empty inherited retirement accounts after the end of the fifth year after the year of the IRA owner’s death. There are some exceptions to this rule—disabled beneficiaries and a child who is under the age of majority.
- Retirement savings cap – There would be a limit or cap on the amount of money you can save in a combination of retirement accounts. You would not be allowed to make additional contributions to retirement accounts once this cumulative amount has been reached. The formula to calculate this cap is the lump-sum payment that would be required to buy a joint and survivor annuity of $210,000 per year starting at age 62. The current amount needed for this purchase is $3.2 million.
How to combat winds of change
Many people were counting on Roth IRAs for their retirement and have converted Traditional IRAs to Roth IRAs. To save for a secure retirement no matter which way the wind is blowing, financially savvy investors know they need to have control of their retirement plan. And, for those who understand alternative investment options, a self-directed IRA can be a great way to build retirement wealth more aggressively. This investment vehicle allows individuals to invest in nontraditional assets that they already know and understand such as real estate, mortgages and other loans, private hedge funds, precious metals, limited partnerships, commercial paper and notes and more.
This diversified portfolio allows the individual the ability to respond to changes in the economic winds or to take advantage of opportunistic (and tax-advantaged) investments with greater flexibility. A self-directed IRA administrator like Next Generation Trust Services handles all the details of the transactions and holds the assets.
At Next Generation, our professionals are available to answer questions about self-directed retirement plans and our transaction specialists ensure you are investing within IRS guidelines. Since we do not give investment advice, we strongly recommend you consult your trusted financial advisors about your specific Traditional or Roth IRA and your retirement investments. Contact Next Generation at (888) 857-8058 or Info@NextGenerationTrust.com for information about how a self-directed Roth IRA can help you no matter which way the wind is blowing.
Read about a Traditional IRA vs. Roth IRA on our website.Back to Blog