Answering Reader Questions About the President’s Budget Proposals

By Jeffrey Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott

Last week, I wrote a column for MarketWatch and The Slott Report that detailed the 14 proposals in the President’s budget that, if implemented, would have a direct impact on retirement accounts. Since that time I’ve been flooded with questions and comments about the proposals, how they would work and what my personal feelings about them are. Below are my responses to a handful of those inquiries.

Why are there so many proposals targeting the rules for retirement accounts?

I think this one is pretty obvious, actually. The words “follow the money” come to mind. Americans currently hold well north of $20 trillion dollars in retirement accounts. To put that into perspective, the National debt is “only” about $18 trillion. The overwhelming majority of the $20+ trillion that’s held in retirement accounts is pre-tax money, meaning that it has yet to be taxed. To a broke government, it would be hard not to look at these accounts as a big, juicy steak. To be fair, though, not all of the proposals in the President’s budget are intended to be revenue raisers. In fact, many of them would have little to no impact.

What proposals have the most likely chance of becoming law?

It’s funny, I actually thought about ranking these from most likely to least likely to actually become law when I wrote my initial analysis, but ultimately decided to avoid making predictions about something that would be controlled, to a large degree, by Congress. That said, I think the proposals that have the greatest chance of becoming law one day are those that are the least controversial and will not significantly increase individuals’ tax burdens.  Here are the four provisions I think have the best chance of wiggling through Congress at some point.

• The creation of a semi-flexible “hardship” exception to the 10% early distribution penalty for the long-term unemployed. Think about it, if this shows up in a bill, who is going to lead a rallying cry against the long-term unemployed?

• Allow non-spouse beneficiaries to make 60-day rollovers. As I mentioned in my article last week, this provision would eliminate one of the most damaging – and also irrevocable – mistakes made by beneficiaries. It would also cost the government almost nothing to implement. There’s no reason, whatsoever, why this shouldn’t become law.

• Facilitate annuity portability – Another proposal that would make things easier for both the “haves” and the “have nots” and cost the government nothing in the way of revenue.

• Eliminating RMDs (required minimum distributions) if your total tax-favored retirement account balance is $100,000 or less (although I could see Congress adjusting the $100,000 threshold as part of a compromise). Perhaps surprisingly to some, implementing this provision would have little impact on federal revenue as well.

Which proposals do you support?

I’m not going to go proposal by proposal here, but my general position is that I am pro-retirement. Anything that helps people save more for them and their loved ones, so that they can provide for themselves, I support. Anything that makes achieving those goals more difficult, I’m against. So things like allowing non-spouse beneficiaries the ability to make 60-day rollovers are, to me at least, no brainers. Why should someone’s life savings become taxable all in one fell swoop simply because their beneficiary was not aware of a quirk in the law? It makes no sense.

Which proposals do you oppose?

Again, I don’t really want to get into a proposal by proposal review here, but I’ll tell you the proposal I have the biggest problem with… creating RMDs for Roth IRAs. And it’s not for the reason you might think. I am not a fan of having RMDs for Roth IRAs in any way shape or form, but that’s not my real objection to the Roth IRA RMD proposal included in this year’s budget. Instead, my firm objection to the proposal is rooted in the fact that it would change the rules for any existing Roth IRA owners who would not ye  be age 70 ½ at the end of this year.

I don’t believe that the rules of the game should be changed at halftime if one team’s unhappy with the outcome of the first half. You finish the game with same rules set at the beginning. If the President’s administration feels that Roth IRAs should have RMDs and they want to implement that change, then they should grandfather any existing Roth IRA owners into the existing no-RMD rule. I wouldn’t be a huge supporter of changing the Roth IRA RMD rules for new Roth IRA money either, but I wouldn’t strongly oppose it either. At least people making Roth IRA contributions and conversions would know what they were getting into at that point.