Dear Commander Bun Bun,
I heard that there are some new rules that were proposed by President Obama that IRA owners should know before planning their estate or transferring money between IRAs. Do you know about them and, if so, can you explain?
Thanks for your help!
Under President Obama’s FY2016 budget, some of the tax strategies used to contribute to Roth IRAs or maximize the tax benefits on inherited IRAs will go away.
Currently, to make full or partial contributions to a tax-friendly Roth IRA, income must be under $131,000 for an individual and $193,000 for a married couple. High earners have gotten around this by making nondeductible contributions — up to $6,500 a year for older investors — to a traditional IRA, which doesn’t have income limits as long as investors aren’t claiming a deduction. After that, they convert the traditional IRA to a Roth.
In addition, workers who are allowed to make after-tax contributions to their 401(k) plans can also roll that money into a Roth. In this scenario, after-tax contribution limits are even higher, so savers could sock away $30,000 or more a year into a Roth IRA.
Under the president’s proposal, these loopholes would be shut starting in 2016. Below is what it would mean:
- Money contributed on an after-tax basis to a traditional IRA or retirement plan could not be converted to a Roth.
- The president would require that non-spouses who inherit IRAs — with a few exceptions — take all the money out of the account within five years. Currently, they can take distributions over their own life expectancy, which means the funds can remain in the account for decades and continue to grow while taxes are spread out.
- Owners of Roth IRAs would be required to take minimum distributions after age 70½, as people do with traditional IRAs, 401(k)s and even Roth 401(k) accounts. However, people who have a combined value of up to $100,000 in all IRAs, 401(k)s and retirement accounts will be exempt from mandatory minimum distributions.
- Unemployed individuals can tap IRAs before age 59½ on a limited basis without triggering a 10% penalty. A new proposal would expand this, allowing the long-term unemployed — those out of work for more than 26 weeks — to withdraw money from IRAs and 401(k)s early without penalty. It would apply to distributions of up to $50,000 annually over two years.
- If your employer offers an annuity through its retirement plan and later drops it as an investment option, you would be able to roll over that annuity into an IRA or other retirement plan. Otherwise, a worker would be forced to liquidate the annuity.
The administration argues that these inherited IRAs were meant to provide retirement security to the original owner, not become a tax shelter for heirs. Of course, these changes would require the backing of Congress, which is unlikely to happen at this point, says Jeffrey Levine, an IRA technical consultant with Ed Slott and Co.
Hop this is helpful,
Commander Bun Bun