2016 Budget Proposal

[SaintM]

I'm not sure if this article, or other discussion of the president's 2016 budget proposal, made it on here.  Among other things, the president really wants to put the tax clamp on retirement savings.  Proposed changes include including killing back-door IRA conversions, adding RMDs for Roths, and eliminating the "stretch IRA."

http://www.marketwatch.com/story/president-obamas-2016-budget-targets-retirement-accounts-2015-02-05

[tennisray]

RMD's for the Roth would suck.  I can see the reasoning behind the change, but I think the tax code is terrible as it is.  I'm all for the Fair Tax...even though it would mean that I will be taxed twice on all my Roth $.  I'm all for taxing consumption and not income (and I'm a democrat!)

[seattlecyclone]

Yeah, there were a few threads about the budget proposal on here. As much as many of these proposals would be bad for people like us, they do make quite a bit of sense. There shouldn't be an income limit for IRA contributions that is trivially bypassed. Either remove the limit or remove the backdoor. Should Roth IRAs double as amazing tax shelters for inherited funds? Maybe, maybe not. Once you have stashed away enough in tax-advantaged accounts to guarantee yourself a very comfortable retirement, should we give you further tax breaks to put more money in there? Perhaps not. Regardless, no substantive changes will happen in this or any other area until Congress and the presidency are controlled by the same party.

[LordSquidworth]

RMD's for the Roth would suck.  I can see the reasoning behind the change, but I think the tax code is terrible as it is.  I'm all for the Fair Tax...even though it would mean that I will be taxed twice on all my Roth $.  I'm all for taxing consumption and not income (and I'm a democrat!)

What's the point of RMD on Roth? Money is withdrawn tax free. It might make some spend more, but not the more investor oriented.

[johnny847]

RMD's for the Roth would suck.  I can see the reasoning behind the change, but I think the tax code is terrible as it is.  I'm all for the Fair Tax...even though it would mean that I will be taxed twice on all my Roth $.  I'm all for taxing consumption and not income (and I'm a democrat!)

What's the point of RMD on Roth? Money is withdrawn tax free. It might make some spend more, but not the more investor oriented.

Yea I'm not quite sure what the government's interest is in forcing money out of Roth accounts since there's no income taxes to be paid. I guess it might encourage people to spend that money and stimulate economy. But honestly if you're forcing people to withdraw more  from their Roth than if a RMD weren't in place, I doubt that people would spend much of it anyways - they'd probably just reinvest it.

Maybe there's something I'm missing here though

[brooklynguy]

What's the point of RMD on Roth? Money is withdrawn tax free. It might make some spend more, but not the more investor oriented.

RMDs on Roth accounts would prevent you from continuing to shelter all the earnings from tax indefinitely and, as seattlecyclone pointed out, keeping all the funds in the account as an tax-sheltered vehicle for transfer of wealth at death.

[johnny847]

What's the point of RMD on Roth? Money is withdrawn tax free. It might make some spend more, but not the more investor oriented.

RMDs on Roth accounts would prevent you from continuing to shelter all the earnings from tax indefinitely and, as seattlecyclone pointed out, keeping all the funds in the account as an tax-sheltered vehicle for transfer of wealth at death.

But I mean if it's not taxed on withdrawal anyway, the government doesn't get a direct cut of it. I mean if it stimulates the economy it does, but I'm guessing those forced into RMDs will just reinvest in a taxable anyway.

Also, aren't there RMDs on inherited Roth IRAs anyways?

[brooklynguy]

...but I'm guessing those forced into RMDs will just reinvest in a taxable anyway.

Right, at which point the earnings are no longer sheltered from tax as they would have been if the RMD didn't force you to make the withdrawal in the first place.

Also, aren't there RMDs on inherited Roth IRAs anyways?

Yes, but RMDs on the Roth while the owner is still alive would force some of those funds out of the Roth before death, preventing that portion of the funds from being inherited as a Roth and instead making them part of the normal taxable estate.

[johnny847]

...but I'm guessing those forced into RMDs will just reinvest in a taxable anyway.

Right, at which point the earnings are no longer sheltered from tax as they would have been if the RMD didn't force you to make the withdrawal in the first place.

Ah right. I should've realized I was missing something.

Also, aren't there RMDs on inherited Roth IRAs anyways?

Yes, but RMDs on the Roth while the owner is still alive would force some of those funds out of the Roth before death, preventing that portion of the funds from being inherited as a Roth and instead making them part of the normal taxable estate.

Well true, but the vast majority of Americans aren't even affected by the estate tax anyway right? The lifetime estate tax exclusion is something like $5.2M? So I don't think that will be a big factor, though the money into a taxable would be.

[seattlecyclone]

Also, aren't there RMDs on inherited Roth IRAs anyways?

Sure, but they're calculated based on the lifetime of the heir using the IRS Single Life Expectancy table. For example, if the beneficiary of your Roth IRA was your five-year-old granddaughter, her life expectancy at the time of your death is 77.7 more years. Thus the first year's RMD would be the total balance divided by 77.7 (1.28%). Then the next year she would have to take out the total balance divided by 76.7 (1.3%), and so on, subtracting 1 from the divisor each year. That leaves the potential for a lot of tax-free growth over the heir's lifetime. Your granddaughter would be in her 50s before her RMD even exceeded a 4% SWR.

[skyrefuge]

So I don't think that will be a big factor, though the money into a taxable would be.

It's perhaps important to realize that none of this RMD "simplification" will be a big factor.

According to the budget's numbers (p.124), this particular proposal is expected to reduce the deficit by a total of $5M in its first 5 years (for some reason it's actually projected to increase the deficit slightly in its first few years, but then the yearly decreases start getting larger). In comparison, the proposal to allow long-time part-time workers into 401(k)s is expected to increase the deficit by $253M over 5 years, and the proposal to allow penalty-free withdrawals for the long-term unemployed is expected to increase the deficit by $1.1B over 5 years.

So that $5M is essentially "nothing", which leads me to believe this is a rare case of political honesty, and the reason for the proposal is actually just to "simplify" the rules between IRAs, rather than to generate revenue. And conversely, since the "benefit" to the government isn't that great, that means the "cost" to investors must not also be that great.

[johnny847]

Also, aren't there RMDs on inherited Roth IRAs anyways?

Sure, but they're calculated based on the lifetime of the heir using the IRS Single Life Expectancy table. For example, if the beneficiary of your Roth IRA was your five-year-old granddaughter, her life expectancy at the time of your death is 77.7 more years. Thus the first year's RMD would be the total balance divided by 77.7 (1.28%). Then the next year she would have to take out the total balance divided by 76.7 (1.3%), and so on, subtracting 1 from the divisor each year. That leaves the potential for a lot of tax-free growth over the heir's lifetime. Your granddaughter would be in her 50s before her RMD even exceeded a 4% SWR.

Ah gotcha. Makes sense. Considering I don't have any children, I never bothered to look up the details ;). And my parents don't have a Roth either (they really should, they make too much for deductible IRA contributions, but they're set in their ways. They max their 401k though).

So I don't think that will be a big factor, though the money into a taxable would be.

It's perhaps important to realize that none of this RMD "simplification" will be a big factor.

According to the budget's numbers (p.124), this particular proposal is expected to reduce the deficit by a total of $5M in its first 5 years (for some reason it's actually projected to increase the deficit slightly in its first few years, but then the yearly decreases start getting larger). In comparison, the proposal to allow long-time part-time workers into 401(k)s is expected to increase the deficit by $253M over 5 years, and the proposal to allow penalty-free withdrawals for the long-term unemployed is expected to increase the deficit by $1.1B over 5 years.

So that $5M is essentially "nothing", which leads me to believe this is a rare case of political honesty, and the reason for the proposal is actually just to "simplify" the rules between IRAs, rather than to generate revenue. And conversely, since the "benefit" to the government isn't that great, that means the "cost" to investors must not also be that great.

That's just sad. I have the opposite viewpoint - if it's essentially "nothing," why take away something that is beneficial to taxpayers? Ugh

I don't necessarily agree with your last statement though. You're assuming that it's a zero sum game. But in theory, somebody who isn't forced into RMDs could make more investments in companies to stimulate the economy and increase the government's corporate tax revenues.
At least, that's how I think it should work. I know how I want to invest (3 fund portfolio) but I don't really have a detailed understanding of how the economy works, simply because I don't need to know that level of detail.

[brooklynguy]

...which leads me to believe this is a rare case of political honesty, and the reason for the proposal is actually just to "simplify" the rules between IRAs, rather than to generate revenue.

I agree.  As explained in the Treasury Green Book (page 143), the proposal would also eliminate the incentive that currently exists to move funds from a Roth 401k into a Roth IRA  in order to avoid RMDs (which under current law illogically apply to Roth 401ks but not Roth IRAs) even though there may be independent reasons to favor keeping funds in a Roth 401k.

[Wolf359]

Also, aren't there RMDs on inherited Roth IRAs anyways?

Sure, but they're calculated based on the lifetime of the heir using the IRS Single Life Expectancy table. For example, if the beneficiary of your Roth IRA was your five-year-old granddaughter, her life expectancy at the time of your death is 77.7 more years. Thus the first year's RMD would be the total balance divided by 77.7 (1.28%). Then the next year she would have to take out the total balance divided by 76.7 (1.3%), and so on, subtracting 1 from the divisor each year. That leaves the potential for a lot of tax-free growth over the heir's lifetime. Your granddaughter would be in her 50s before her RMD even exceeded a 4% SWR.

Of course, my 5-year-old granddaughter would have some difficulty reading IRS publications to find the Single Life Expectancy Table to calculate her RMD in the first place.  Even if there was a picture of a Disney Princess in there. <grin>

[skyrefuge]

That's just sad. I have the opposite viewpoint - if it's essentially "nothing," why take away something that is beneficial to taxpayers?

Because it'll make it easier for us to give advice on this forum! Currently, we try to give simple, clear, one-size-fits-all advice as much as we can, particularly to newbies, but then some asshole will always come along with some crazy-ass (but not untrue!) special case and say "but, maybe the Roth is a better choice than Traditional if they're concerned about RMDs 50 years from now!" Or "the 401(k) has better bankruptcy protection than an IRA!" Or "do you live in Texas or New York?" And then that leads to me and you and Dodge and brooklynguy and Cathy turning a simple question into a 20,000-word thread filled with charts and math and USC citations and a bewildered OP who says "Fuck this noise, I have no idea what the hell these psychos are talking about, so I'm just going to spend this money on a new car lease."

IS THAT WHAT YOU WANT JOHNNY847? IS THAT WHAT YOU WANT?!?

I don't necessarily agree with your last statement though. You're assuming that it's a zero sum game. But in theory, somebody who isn't forced into RMDs could make more investments in companies to stimulate the economy and increase the government's corporate tax revenues.

I guess the debate at that point is whether the untaxed money kept in the Roth does a better job of growing the economy than taxed RMDed money that might be reinvested, or spent into the consumer economy. Luckily we don't have to figure that out, because a debatable, unknowable fraction of an infinitesimal number is an even-more infinitesimal number.

[brooklynguy]

That's just sad. I have the opposite viewpoint - if it's essentially "nothing," why take away something that is beneficial to taxpayers?

Once you consider the cost be "nothing," the benefit to taxpayers is by definition also "nothing."  (As we said above, the cost and benefit are not actually nothing, but in the scheme of things they are close enough to being nothing that elimination of that negligible cost to the government is probably not what's driving the proposal.)  Simplification of the tax laws for its own sake is a worthy objective when it comes at no (or minimal) cost, but this goes farther than simplification -- it is a step towards "logical coherification," since it would remove one of the (many) illogical distinctions that exist between the IRA world and the 401k world.

[johnny847]

That's just sad. I have the opposite viewpoint - if it's essentially "nothing," why take away something that is beneficial to taxpayers?

Because it'll make it easier for us to give advice on this forum! Currently, we try to give simple, clear, one-size-fits-all advice as much as we can, particularly to newbies, but then some asshole will always come along with some crazy-ass (but not untrue!) special case and say "but, maybe the Roth is a better choice than Traditional if they're concerned about RMDs 50 years from now!" Or "the 401(k) has better bankruptcy protection than an IRA!" Or "do you live in Texas or New York?" And then that leads to me and you and Dodge and brooklynguy and Cathy turning a simple question into a 20,000-word thread filled with charts and math and USC citations and a bewildered OP who says "Fuck this noise, I have no idea what the hell these psychos are talking about, so I'm just going to spend this money on a new car lease."

IS THAT WHAT YOU WANT JOHNNY847? IS THAT WHAT YOU WANT?!?

I don't necessarily agree with your last statement though. You're assuming that it's a zero sum game. But in theory, somebody who isn't forced into RMDs could make more investments in companies to stimulate the economy and increase the government's corporate tax revenues.

I guess the debate at that point is whether the untaxed money kept in the Roth does a better job of growing the economy than taxed RMDed money that might be reinvested, or spent into the consumer economy. Luckily we don't have to figure that out, because a debatable, unknowable fraction of an infinitesimal number is an even-more infinitesimal number.

Why yes, it is what I want! I mean, if it weren't for these intricate special cases, how else would I spend my free time??

But yea I'm pretty tired of seeing the same questions over and over, a simplification of the rules would lead to less of that (hopefully).And j

And I concede that debating the merits of something that has basically no benefits in the big picture is pointless. I guess I'm just greedy and want the current rules to stay in place so I can take advantage of them when the time comes.