Reuters has reported Click Here to Read Full Article that President Obama and Congress are looking to close 3 tax loopholes. The first loophole is one that we discussed in our March 7, 2012 Blog Posting. Persons who are ineligible to make a Roth IRA contribution make a traditional IRA contribution and then immediately convert the traditional IRA to a Roth IRA. Usually this tax planning strategy can be done with little or no income tax paid. President Obama’s 2016 budget proposal suggests that future Roth conversions be limited to pre-tax money only, effectively killing this back door strategy.
The second loophole involves using “stretch IRAs”. Using this strategy, (wealthy) individuals convert their traditional IRAs to Roth IRAs (paying the tax on the conversion) with the objective of providing tax-free income to their heirs for decades. The heirs inherit the Roth IRAs, and since Roth withdrawals are not typically taxed, the heirs receive tax-free income when distributions are made. Congressional thinking is that IRAs were intended to be used for retirement purposes and not as a bonanza for inheritors. Reuters reports that Congressional bills have included a provision to kill this technique and replace it with a law requiring beneficiaries (other than spouses) to withdraw the money within five years. The fact that withdrawals must be made within 5 years will make Roth conversion planning for the benefit of future generations of heirs less attractive.
Obama’s budget also wants to eliminate Social Security claiming strategies. While the provisions he wants to eliminate were not specified, Reuters reported that retirement experts think he will be targeting the “file and suspend” and “claim now, claim more later” strategies. Very briefly, these strategies are combined and when a spouse reaches full retirement age, that person applies for Social Security benefits and immediately suspends the benefits so their benefits can continue to grow until they reach an older age, say 70. Rather than receiving Social Security benefits based on their earnings record, that person claims a spousal benefit. Thus the claimant is receiving a reduced spousal benefit today (claim now) and will receive a higher benefit in the future based on their earning record (claim more later).
If you want to learn more about tax preparation services or tax planning strategies related to your retirement planning, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.