A few decades ago, retirement planning for Americans was built on a “three-legged stool” of company- or government-sponsored pension plans, Social Security, and private savings accounts, specifically tax-preferred savings accounts such as IRAs, 401(k)s, Roth IRAs, etc.
Today, less than 15 percent of employees in the private sector participate in a defined pension plan, according to MarketWatch. Employers have moved employees into 401(k) programs, where the burden of saving for retirement has shifted from the employer to the employee. Instead of supplementing company-sponsored pensions, 401(k)s and self-directed savings programs that were supposed to help fill the gap are now the only retirement planning options for many. Still, only 40 percent of baby boomers have saved in excess of $100,000 for retirement.
Today’s deficits helped set the stage for President Obama’s proposed changes to the three-legged stool strategy in his 2015 budget proposals. One proposal would raise taxes on Americans with large tax-preferred accounts. Bloomberg says, “This proposal would generate an estimated $28 billion in savings.”
Many of today’s seniors work — and not necessarily because they have to. Some enjoy their work and would work for as long as they could. Many who work for the pleasure of it are saving up what they can to pass on to their heirs. We’ll look at how the proposed changes could affect seniors’ retirement planning.
Limit Retirement Savings Tax Breaks
According to Bloomberg, the proposal “would cap how much Americans could accumulate in tax-preferred retirement savings, putting a ceiling of about $200,000 on the annual retirement income that could be generated by such savings.” The reasoning behind the proposal is that the government created tax-preferred accounts to help the middle class, but the administration feels they have primarily benefited the wealthy. Some people accumulated millions of dollars, “substantially more than is needed to ensure a secure retirement,” according to the administration.
Once your tax-preferred balance reaches $3.2 million, you would no longer receive such preferential tax breaks.
No one knows if this budget proposal will pass. With today’s composition in Congress, it’s likely that it may not pass this or the next Congress. However, with “a pen and a phone” form of government, anything’s possible, and the longer a proposal is discussed in Washington, the more likely it is that it passes at some point.
Roth IRA Changes
Credit Union Insight warns that the administration “has proposed ‘harmonizing’ the required minimum distribution (RMD) rules for tax-favored retirement accounts that would … subject Roth IRAs to the same RMD rules as Traditional IRAs.” The proposal would also prohibit contributions after age 70.5, requiring those with Roth IRAs to begin receiving their RMDs and reduce the amount of Roth IRA monies that would pass to their heirs tax-free.
If it looks like these budget proposals might affect you, contact your financial planner. You’ll find plenty of tax-exempt investment opportunities outside of tax-preferred retirement accounts. Review your will and other forms of estate planning in the same meeting.
While these budget proposals might pass in a different form (or not at all), it’s best to be aware and prepare. Contact your financial planner so you can keep on top of these potential changes and know what the best course of action is for you to take.