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New Budget Proposal May Change Roth IRA’s

Every year around this time the President sends a budget proposal for Congress to consider when coming up with their budget resolution.  This year President Obama has proposed changes that could impact some features of Roth IRA’s.

One proposal  was to close the so called “Backdoor Roth IRA Conversion.”  As it currently stands, individual tax filers making above $132,000 ($194,000 for Married Taxpayers Filing jointly) are ineligible to make a Roth IRA contribution in 2016.  However, some take advantage of a loophole in which they can make a non-deductible IRA contribution to a Traditional IRA and then convert this to a Roth IRA since there are no income limitations to Roth IRA Conversions.  The President’s proposal would eliminate this loophole by limiting conversions to only pre-tax IRA Contributions.

The other proposal the President made was to introduce Required Minimum Distributions (RMD) to Roth IRA’s.  Currently, a major advantage of a Roth IRA (compared to a Traditional IRA) is that you are never required to take distributions during your lifetime.  In addition, those age 70 ½ or older can still make contributions to a Roth IRA (subject to the income limits mentioned above) but not to a Traditional IRA.  The proposals would “harmonize” these differences between Traditional IRA’s and Roth IRA’s.  In the President’s proposals, those age 70 ½ would have to take Required Minimum Distributions (RMD) from their Roth IRAs in the same manner as those that have Traditional IRAs.  In addition, contributions to a Roth IRA after age 70 ½ would be eliminated.  While there are no direct tax implications, it would remove the potential for years of tax free growth that accompanies Roth IRAs!

These proposals have been discussed in Washington in past years but have never been passed in a budget deal.  What happens this time around remains to be seen.