President Obama’s latest budget proposal seeks to address once policy issue: the federal government wants more money. That fact is, American wealth is being concentrated into retirement accounts and the government wants more of it than it already receives. Here’s three proposals from the President’s budget proposal that would weaken the current benefits of saving for retirement.
In an effort to halt so called “Back-Door” Roth IRAs, President Obama’s budget proposal would eliminate the ability to convert “after-tax” dollars in a traditional IRA or employer based plan to Roth. You could still convert “pre-tax” dollars that are in a traditional IRA or employer plan to Roth. For example, a traditional IRA with pre-tax dollars could be converted to a Roth IRA as their is tax due on this conversion and the IRS wants your money. However, many high-income earners who could not contribute to a Roth IRA have instead made “after-tax” contributions to their retirement plan (where they receive no deduction) and they have been able to convert those amounts to Roth dollars with no taxes on the conversion (since the dollars are after-tax) under what has become known as a “Back-Door” Roth IRA. Click here for a prior article I wrote on the “Back-Door” Roth IRA.
Other bad ideas found in the budget include imposing required minimum distributions (RMD) on Roth IRAs. RMDs have never applied to Roth IRAs because taxes have already been paid on the funds but the new proposal would require RMD on Roth IRAs when the account owner reaches 70 1/2 in a manner similar to traditional IRAs.
And finally, the budget proposal would limit the ability to contribute to a retirement account once your retirement account values exceed approximately $3.4M. The account could still grow but no new contributions would be allowed. This would be a first of its kind rule as total account success has not been a restriction in your ability to contribute into the most popular retirement accounts like IRAs and 401(k)s. While most people don’t need to worry about exceeding $3.4M in their retirement account, setting a ceiling on account growth seems to be a dangerous precedent.
Want to know the good news, President Obama has never had a budget approved. Not even when his party controlled both houses of Congress.