This is the time of year that details of a new budget for the coming fiscal year are revealed. President Obama is making his 2015 budget proposal, and some of the potential changes could impact Roth IRA accounts.
Right now, Roth IRAs are popular because of the tax advantages. While contributions are made with after-tax dollars, the earnings grow tax-free. Not only that but there are no minimum distributions required with a Roth IRA. Other tax-advantaged accounts force you to take distributions when you reach the age of 70 ½, but the Roth IRA is a notable exception for account owners.
On top of that, inherited Roth IRAs allow non-spouse recipients to take “stretch” payments. So, even though they have to take distributions from inherited Roth IRAs, they can stretch the distributions out over time, continuing to take advantage of tax-free earnings.
All that could change, though, if President Obama’s budget proposals regarding Roth IRAs are adopted. Here is what he’s proposing:
1. Required Minimum Distributions (RMDs)
Right now, there are no RMDs for Roth IRAs for account owners. So, you don’t have to take money from your Roth IRA if you don’t want to, or you can take a small amount if you need to. It’s a great way to grow your wealth without worrying about taxes, and worrying about how it adds to your taxable income.
However, Obama’s 2015 budget proposal gets rid of the Roth IRA exception for RMDs. Like other tax-advantaged accounts, the requirement would be to start taking RMDs at age 70 ½. While the earnings would still be tax-free, you would now be forced to start drawing down the assets. This means that less would be available to hand down to heirs.
Others worry that this might be a first step toward changing the Roth IRA in such a way that earnings no longer grow tax-free over time. It’s an interesting discussion about the future of the Roth, and what the future holds.
2. No More “Stretch” Payments on Inherited Roth IRAs
When an IRA is inherited, non-spouse beneficiaries are required to start taking payments immediately. However, as things stand at this time, they can stretch the payments out over their lifetimes. This provides heirs with a way to enjoy the benefits a little bit longer, and it allows the bulk of the assets to continue to earn.
Obama’s latest budget proposal gets rid of the idea of stretch payments. Instead, non-spouse beneficiaries (except in very specific cases) would be required to have all the funds disbursed within five years of the owner’s death. This speeds up the process, and it also means that the money isn’t sitting there, accruing more tax-free growth, over an heir’s lifetime.
These are just proposals, of course. The budget that any president proposes is rarely adopted in its original form. However, it’s something to think about. While a Roth IRA might still be a great retirement planning tool, the tax benefits, and the estate planning benefits, might not remain as attractive in the future.