The 2017 Congressional budget proposal includes six little-known but important tax time bombs that could affect your clients' individual retirement accounts.
Joe Ross, vice president of sales productivity and business development for American International Group Life and Retirement, outlined these tax proposals and what they could mean for your client during a workshop on Wednesday at the National Association of Independent Life Brokerage Agencies' annual conference in Dallas.
Ross noted it will be interesting to see the influence a new president will have on the overall budget, and whether these individual tax proposals will remain under the new administration.
"It's not necessarily true that what we are talking about today will change under a new administration," Ross said, "because this is not the Obama administration's budget proposal, it's the Congressional budget proposal."
(Related: 18 Reasons Americans Are Afraid to Retire)
He said most people don't know about these tax proposals because they are not law, but the fact that some of them have been showing up in proposals for six or seven years suggests there as at least some momentum driving a few of them forward. "I think some of this is just a question of time."
One of the themes of many of the IRA-related tax proposals that continue to surface in budget proposals is that they target wealthy investors, said Ross.
"These are not things that are going to affect the small investors," Ross said. "This is going after the people that have the money, and that's partly because we've got a $20 trillion debt and we've got about $10 trillion worth of IRA assets out there. To have $10 trillion in IRA assets out there that are fully taxable, you can see there's a huge opportunity for the IRS to pick up a significant amount of tax revenue here."
Keep reading for six budget proposals Ross outlined that could affect IRAs…
Currently, beneficiaries have the option of taking an inherited IRA via a lump sum or through stretching. (Photo: iStock)
1. Eliminate the ability for non-spouse beneficiaries to stretch IRAs
Current rules allow beneficiaries to take required minimum distributions based on their life expectancy. The younger the beneficiary, the lower the required minimum distribution, which allows more funds to remain in the account over time.
The language of the proposal to eliminate stretching says: "The RMDs are designed to prevent taxpayers from leaving these amounts to accumulate in tax-exempt arrangements for the benefit of the taxpayer's heirs."
"It could not be more painfully clear that the IRS has taken the position that they want to make sure that IRAs are preserved for the investor, but they don't care what happens when it moves onto the next generation and they are prepared to take their pound of flesh," said Ross.
The benefit to the IRS of limiting stretching is that it accelerates revenues flowing into the IRS and it creates a situation where beneficiaries are likely to be forced into taking a lump sum distribution right at a time when they are in their peak earning stage, which could push them into a higher tax bracket and create additional tax revenues for the IRS.
Proposed rules could eliminate back-door Roth IRA strategies. (Photo: iStock)
2. Impose required minimum distributions on Roth IRAs
This proposal, which has been in Congressional budget proposals for six years, would require people to take required minimum distributions from their Roth IRAs. Why would the IRS want to force people to withdraw a minimum amount per year from their Roth IRA?
