401kRollover Blog

These retirement plan changes are coming sooner than later and could mean missing out on your dreams

The President outlined some drastic changes to retirement planning in his 2017 budget. These retirement planning changes aren’t law yet and my not be for some time but don’t think that means they are not important.

Any proposed changes to retirement plans will have to make it through Congress to become law. That’s not likely in an election year but that doesn’t mean they won’t come back later. These are some monumental retirement changes that the government is targeting and could cost you the retirement of your dreams.

Higher Taxes and Fewer Retirement Options in Obama’s 2017 Budget

Most of Obama’s proposed retirement plan changes seek to close tax loopholes for retirement savers. The Federal Debt Clock passed $19 trillion this year and the government is looking everywhere to close the deficit gap. The President’s 2016 budget proposal included $2 trillion in new taxes but evidently wasn’t enough.

The biggest retirement plan change is targeted at Roth IRA plans, after-tax funded retirement accounts that can be used tax-free in retirement. The government has already closed these accounts to high-income earners by limiting contributions to households making less than $194,000 a year. Congress opened up what’s called a back-door Roth IRA in 2010 when it eliminated the income limit on conversions from a traditional IRA to a Roth. That meant even high-income retirement savers could get the tax-free advantages of a Roth by opening a traditional IRA and then converting to a Roth.

Roth IRA plans are an important retirement planning tool no matter what your tax outlook is in the future. It’s obvious that taxes will be going up over the next several decades. The government has proven that it prefers cutting tax deductions and raising taxes rather than controlling its own spending. Even if you expect to be in the lower income brackets during retirement, those lower brackets can always have higher rates. Diversify your retirement tax liability just like you diversify your investments, by holding money in both traditional and Roth IRA accounts.

The President wants to kill Roth conversions by only allowing them from pre-tax money. He also wants to require minimum distributions on Roth IRA accounts. Traditional IRAs require minimum distributions once you reach 70 ½ years but there’s no requirement for Roth accounts. This makes it a very attractive estate planning tool since the accounts can be passed through to heirs.

The President is proposing to drop the required minimum distribution rule for traditional IRA accounts of less than $100,000 but the retirement plan change is mostly meaningless. Account holders with less than $100k are likely withdrawing more than the minimums anyway. I hope the President doesn’t think he’s doing retirement savers any favors.

Finally, the President’s retirement proposals seek to limit contributions to tax-advantaged retirement accounts for those with accounts under $3.4 million. The President tried passing this one in 2014 as well but got nowhere. Retirement plan contributions are already severely limited for high-income earners but could get much worse.

Most of the President’s 2017 retirement plan changes won’t see the light of day in the Republican-controlled Congress. Even the Democrats don’t want their name on these changes during an election year. That doesn’t mean they can’t come up again next year or be attached to other legislation. The White House has targeted retirement benefits to cover its own out-of-control spending. Make sure you take advantage of the benefits before they go away.