In March, President Obama unveiled his 2015 fiscal year budget. In an effort to increase revenue by $1,759 trillion over 10 years, this budget again calls for specific proposed limits on savings and benefits in tax-preferred retirement plans which can completely disrupt your retirement planning strategy. According to Jamie Hopkins, associate director of The American College’s Center for Retirement Income, “These changes would benefit the government, but they could have a negative impact on investors and their plans for retirement.”
While it is unlikely that all proposed provisions will gain legislative approval, it’s clear what the administration is focused on, and it is important to understand the specifics ahead of time, in the event that the changes are passed.
Three of the proposed changes have to do with IRA savings limits, Required Minimum Distribution, and Social Security.
Cumulative Limit on Wealth Inside Retirement Accounts
The President has again proposed putting a cap on lifetime retirement accumulated values at roughly $3.2 million. The limit would cumulatively apply to all tax-favored retirement plans including defined benefit plans, defined contribution plans (40lk) and individual retirement accounts (IRAs). Further contributions or accruals would be prohibited once the individual has enough assets for a “secure retirement” as deemed by the government’s standards. The proposal calls for a ceiling of approximately $200,000 on the annual retirement income generated by these accounts.
This change would also limit rollover opportunities from company-sponsored retirement plans and remove some existing estate planning techniques currently afforded by IRAs.
Required Minimum Distribution for Roth IRAs
Unlike traditional IRAs and other retirement accounts, Roth IRAs currently provide a unique benefit in that they are not subject to required minimum distribution rules. This, however, may be changing. The President’s proposal would enforce minimum distribution from Roth IRAs after the owner reaches age 70.5. This change would negatively impact those who use a Roth IRA as an estate planning strategy or those who don’t plan on tapping into the account until they are much older.
The one bright spot here is that there is a possibility that existing Roth IRAs could be grandfathered in and therefore exempt from the minimum distribution rules. If this is the case, then it could be very beneficial to set up a Roth IRA now before the proposal is passed in order to avoid being hit by this change.
Reduction in Social Security Benefits
Buried in the 2015 budget is a proposal for a major change in Social Security regulation. If passed, this provision seeks to eliminate aggressive Social Security claiming strategies, like “claim and suspend”, that significantly increase the size of people’s benefits.
The proposed change, according to Hopkins, “could have a profound effect on well-informed middle and lower income families that are doing exactly what they are supposed to do,” thus leaving investors and financial advisors searching for ways to replace lost Social Security benefits as a source of retirement income.
The phrasing on the provision is vague, and it is not clear if the Social Security Administration could eliminate these claiming strategies by instituting an internal rule change or if it would have to go through Congress. With today’s composition in Congress, it’s unlikely that the budget will pass. However, it’s worth keeping in mind that the longer a proposal is discussed in Washington, the more likely it is that it will pass at some point.
While understanding these proposed changes is a critical first step, it’s important to work closely with your financial advisor in order to maneuver around any changes to maximize the potential of your retirement benefits.
If you’d like talk further about your retirement or how these changes might affect it, please do not hesitate to contact us at www.RNPadvisory.com or call us at (408) 779-0699.
RNP Advisory Services is a Registered Investment Advisor. Securities offered through Foothill Securities, Inc. – Member FINRA/SIPC, an unaffiliated company.
