Last week, I shared three of the six proposals that our government is recommending for your retirement plans. This week, I’m sharing the remaining three with you.
Remember, what is really happening is that two roads are coming together. The first road represents how (surprise, surprise) our government’s overspending ways are becoming a real problem and they want to collect more tax. They see your retirement plan as a nice big piece of un-taxed steak, and they want to take a bite out of it as soon as they can.
The second road is all about what retirement plans are really for, and what they are not for. The purpose of retirement plans are to allow an individual to save money for their retirement and then to actually use that money when they retire to supplement their income. It was never intended to be a wealth transfer device.
Yet, smart financial planners got together with tax planners and estate planners and the next thing you know, stretch IRAs became the norm. The problem with this is that the government doesn’t get their tax money for years and years, and they don’t like it!
So, with all of that in mind, this week I’m sharing the last three of the six proposals.
Proposal 4 28 percent Maximum Deduction; On Contributions
Currently, you get to deduct your retirement plan contributions, and that deduction reduces your taxes based on the tax bracket you are in. If you are in the 15 percent bracket, then your retirement contribution reduces your tax by 15 percent. If you are in the 39.6 percent bracket, then your retirement plan contribution reduces your tax by 39.6 percent.
This proposal seeks to limit your deduction (for higher income earners) to a maximum of 28 percent. I continue to wonder why our government continues to think punishing success is a good idea.
Proposal 5 No Required Minimum Distributions; For Smaller Plan Balances
Once you reach the age of 70 1/2, you need to begin to withdraw a certain minimum amount from your plan each year. It is referred to as your “Required Minimum Distribution” or “RMD.” Now the government is proposing that for plan balances less than $75,000, you should not have to do so. This idea I actually like, as it eliminates smaller distributions that are often more of a nuisance than anything else.
Proposal 6 Rollovers Available To Non-Spousal Beneficiaries
Currently, one of the most common mistakes made is when a parent dies. The child is the beneficiary (perhaps the other parent is already gone, or divorced) and they cash out the IRA (or 401k, 403b, etc) with the intention of rolling it over to another IRA within 60 days. While you can do that with your retirement account, you cannot do that with an inherited retirement account. Once you cash out the account, it is done and over and you owe tax on all of it.
The only way this proposal will be enacted (in my opinion) is if they enact the five-year maximum distribution proposal (see proposal 3 from last week). Otherwise, things would become more complicated, not less.
Remember, these are all “proposals” and not yet law. But it has become very clear that as time goes on, our government is becoming more entrenched in the position that your retirement plan is also a big income plan for them, and they prefer to limit your estate planning options.