Roth IRA Advantages at Risk by Proposed Changes
- Updated: November 11, 2014
For millions of investors in the United States, the Roth IRA is extremely attractive. This retirement option has become so popular that by the end of last year, contributions topped $500 billion, this according to an investment organization’s report.
However, in looking at the 2015 budget proposed by President Obama, some of the most alluring features of the Roth IRA, which have to do with rules for distribution, could be eliminated. If the proposal were to go through, people with Roth IRA accounts would be compelled to take the required minimum distributions starting at age 70.5.
Another proposed change would require non-spousal beneficiaries of IRA owner accounts to disburse inherited IRAs within a five-year period following the owner’s passing. As a result, affected beneficiaries would be prevented from stretching distributions out over their expected lifespan in order to minimize tax penalties.
In a statement from Michael Rubin, CFP professional and founder of Total Candor, clearly, the changes being proposed are designed to increase revenue for a nation in the red, adding the US government’s debt has to be paid.
PL Wallin, CFP professional and founder of Atlas Financial stated the new rules might negatively impact many investors with Roth IRAs. The moves would primarily impact people who have worked hard to save money throughout their lives, making this extremely unfortunate. However, there are some experts who do not believe the changes would have a major impact on investors.
The rule proposed to impose required minimum distributions would line Roth and traditional IRAs up, which already has an age established of 70.5. Andrew Novick, CFP professional with The Investment Connection notes that under the new rules, qualified distributions would be tax-free. He does not believe that perceptions of Roth IRAs will change much, with people still viewing them as a great tax-free growth option.
In comparison, Wallin says that having required and mandatory minimum withdrawals would probable hurt owners of Roth IRAs who want to pass assets down to loved ones. It is also important to note that with the new rule, money would not have as much time to compound tax-free as it did before. The bottom line, this creates an entirely different inheritance for beneficiaries.
Novik said that speeding up distributions of non-spousal beneficiaries will lead to more taxable income now, exactly what the government wants. He feels that this second proposed change would be even more impacting than the first change.
Another CFP professional and founder of Beyond your Hammock, Eric Roberge, agrees that the proposed change would have a drastic impact on people with a lot of money in retirement accounts. By forcing Roth IRA owners to take required minimum distributions at age 70.5, extra money would be depleted, leaving little for beneficiaries.
Over the years, conversions have grown in popularity, primarily among people with high incomes. For instance, in 2010, Roth IRA conversions reached $64.8 billion, surpassing regular Roth IRA contributions for the first time.
Last spring, President Obama unveiled his $3.9 trillion budget for 2015, which shortly after was rejected by the House of Representatives in a 413-2 vote. Although some people are concerned about the new proposals pertaining to Roth IRAs considering the dysfunction in Washington, it will probably not get approval soon.
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