PROPOSED Changes to Retirement Accounts

According to Forbes, Market Watch, and Main Street, Washington D.C. is considering changes to some of the rules when it comes to our retirement accounts.  If you would like to read the complete 150 page budget proposal for Fiscal Year 2016, put forth by the Obama Administration at the beginning of February, you can find it here.  While it is often said that a president’s final budget proposal has essentially zero chance of going anywhere, the fact that these ideas are being presented and discussed makes me question whether they may ultimately come to fruition.

The five proposals that I find to be most concerning are as follows:

  1. In an effort to “close loopholes,” the Obama administration’s final proposed budget includes shutting down the “backdoor” Roth IRA.  While this is talked about in terms of prohibiting this approach by “high income” earners, they fail to account for those of us seeking early retirement and utilizing it for the obvious tax benefits, as well, with several early retiree bloggers having touted this concept.
  2. They want to impose Required Minimum Distributions (RMDs) on Roth accounts, in addition to those already required for Traditional accounts.  RMDs would be eliminated if you have less than $100,000 in ALL of your accounts, though.
  3. The proposal calls for a cap on what you and I can save for retirement, whereby once you reach this limit, you can no longer contribute any further funds, apparently even including further contributions by your employer.  According to Market Watch, “The cap would be calculated by determining the lump-sum payment it would take to produce a joint and 100% survivor annuity of $210,000 a year, beginning when you turn 62. Currently, this would cap retirement savings at approximately $3.4 million.”  Albeit I don’t foresee myself working long enough to reach that high of a contribution amount, I still find it asinine that the government is so full of itself to tell us “oh, I’m sorry, you’ve saved too much!”  – PLUS…not to mention (although not surprising,) THEIR MATH IS WRONG!!!  $210,000 a year out of $3.4 million equates to a 6% withdrawal rate.  According to my cfiresim calculations (please double check MY math :-D), this scenario only has a roughly 44% chance of success over a traditional 30 year retirement.  And if this “annuity” is referring to an investment vehicle that provides a fixed income ($210,000 in this case) for the individual and surviving spouse during their lifetime, in most cases, that leaves nothing to pass along to heirs.
  4. If, when you die, you pass your IRA on to anyone other than your spouse (with some exceptions, of course,) it would be mandatory that the funds be distributed within five years.  I don’t know about you, but I have every intention of passing on a (hopefully) substantial sum of money (via a Roth IRA) to our son and any future children/grandchildren we may have.  Playing by the proverbial rules my entire life should not result in a tax bill for my progeny and they should be allowed to let that account continue to grow and benefit them in their own retirement.  The Market Watch article states “the stretch IRA, by providing tax benefits to individuals the accounts were never really intended to benefit, costs the government a lot of money” (underlined emphasis added by me.)  My response…BOO FRIGGIN’ HOO!!!  The writer of the article further postures that this “isn’t an unreasonable position for the administration to take,” but I beg to differ.  In the words of Dave Ramsey, I am working today in order to forever change my family tree.  While this entails educating my son in the ways of personal finance and teaching him how to set himself up for financial success, as well, it should also afford me the privilege of passing on an unimpeded legacy with the potential to positively affect the future generations of my family and those I love.
  5. The budget proposal also calls for eliminating the student loan interest deduction, as well as Coverdell accounts, and “roll(ing) back a portion of  the subsidy for 529 savings plans” – both of which are aimed at “new contributions.”  We contribute, and intend to continue doing so until he turns 18, to a Coverdell for our son’s future education so I take  an extreme issue with this topic.  Screwing with me is one thing, but screwing with my kid and his future is a whole other ball of wax.

I’ll be the first to admit, I didn’t read the entire budget proposal.  There may well be some excellent ideas tucked away in there on a multitude of topics.  I’m not here to judge the entire document.  Rather, I’m touching on a few key points that resonate with me and that I feel should be shared with my community of fellow bloggers and readers (aka you amazing, wonderful people :-D.)

The takeaway:  my vote is that the government needs to stop looking for ways to raise revenue, whereby taking more and more money out of our pockets.  Instead, what they should be doing is focus on living within their means, thereby decreasing their need for more and more tax money, allowing it to remain in the hands of the citizenry.

So what do you think about these proposal ideas?  Do you support them?  If so, I would love to hear your reasoning.  If you don’t and are as irritated by them as me, I would love to hear your thoughts on that, as well.  No matter your viewpoint, just let me know what’s on your mind in the comments below!  Have an awesome day and weekend!

– Frugal RN

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