by Bill Sweet
It's important to understand that the White House - Executive branch - does not control the tax code, Congress does. So the President can advise and recommend, but ultimately Congress needs to get together and vote in order for any changes to go into law. It is of some comfort that the 2015-2016 proposal identified a similar slate of changes that were not adopted / implemented, but that isn't to say that the situation shouldn't be closely monitored.
A full slate of the proposed changes can be read here:
https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf
The changes on the table that concern me are:
- Eliminating the "stretch" IRA provision for non-spouse beneficiaries. Today, if you inherit an IRA from someone who is not your spouse, you have two options: distribute the entire account fully within five years, or stretch the IRA in small increments according to your life expectancy. Removing the stretch provision would mean that taxpayers would have to potentially blow up their tax return in any given year or over five years if they inherited funds from a loved one. I am very much in favor of keeping the stretch provision intact as it allows for a beneficiary to manage their distributions and tax situation over time. Flexibility is VERY important in tax planning.
- "Harmonizing" Roth and Traditional accounts, meaning that they are recommending that Congress add Required Minimum Distributions (RMDs) to Roth accounts. Currently, only Traditional IRA accounts require RMDs at age 70 1/2. I personally feel that this is a mistake - as the population ages and my clients are living longer, requiring any distribution at any time is not something that I can get behind, as each client's income tax situation is a little bit different.
- Disallowing post-tax conversions from Traditional to Roth IRAs. The proposal would still allow pre-tax conversions, which are sometimes a good idea, but the post-tax conversion is great because it allows taxpayers in higher tax brackets to indirectly contribute to a Roth IRA. Individuals who do this "backdoor" conversion are not getting a free lunch - they are usually paying income tax on their earnings at a higher bracket in the present in order to enjoy favorable tax benefits in the future. Therefore, I don't see the need for this change either.
- Elimination of all step-up basis rules. This would require any taxpayer either receiving appreciated assets via inheritance (e.g., original owner dies), or gift or donation would require the deceased or donor to realize the gain on the date of death or transfer. That would effectively eliminate any step-up basis transfer. While I can understand why this would be a decent proposal for taxpayers choosing to donate their property, since they have a choice, people rarely choose when their life ends.
We'll see what happens over the next few months. The good news is that the White House proposed these changes last year, but didn't act on them. Hopefully that is the case again in 2016-2017.
Sources:
President Obama’s 2016 budget targets retirement accounts - Marketwatch
Obama proposes curbs to retirement-savings tax incentives for wealthy, heirs
President’s Budget Proposes Elimination Of Backdoor Roth, Stretch IRA, and Step-Up In Basis At Death!
- Bill
