Tax Tip of the Week | No. 329 | The Future of Retirement Planning - Part 2

Tax Tip of the Week | November 18, 2015 | No. 329 | The Future of Retirement Planning - Part 2

We are going to run a three-part series of articles written by Wealth Management.com. Several legislative changes are on the horizon that will impact everything we know about retirement planning.  Here is what Washington lawmakers have in their crosshairs:Stretch IRAHere’s the first question on the stretch IRA: Is that a thing?The stretch IRA isn’t really a savings vehicle—it’s an estate-planning strategy for extending the life of an IRA across multiple generations, enabled by IRS interpretation of the tax code. The rule permits non-spousal inheritors of an IRA to continue sheltering the assets from taxation indefinitely, aside from required minimum distributions (RMDs) based on their own life expectancy.“The stretch IRA is on its last legs,” says IRA educator and author Ed Slott. “Phase-out has been attached to every recent tax bill, but just hasn’t been passed yet. Congress never intended this use for an IRA.”Slott prefers other strategies for passing along tax-sheltered assets to heirs, anyway. His favorite? “Take the money out of the IRA now, pay the taxes, and invest the proceeds in a life insurance policy—if you hold it in trust, that money can be inherited tax-free.”Backdoor RothIncome eligibility rules for converting tax-deferred assets to a Roth IRA were repealed in 2010, leaving us with this head-scratcher: Joint filers who wish to contribute directly to a Roth are subject to an adjusted gross income limit ranging from $183,000 to $193,000 this year. But the sky’s the limit for conversions—the so-called backdoor Roth. And there is no income eligibility limit on contributions to a traditional IRA (there are, however, limits on deductibility).Clamping down on the backdoor Roth would mean less near-term tax revenue for the government, since income taxes are paid at the time of conversion. Theoretically, it would generate more revenue down the line, since would-be-converted amounts would continue to grow in traditional IRAs, with taxes due at the time of withdrawal.“This one could go, because there wouldn’t be much of a political constituency to fight it,” Slott says. “The average consumer doesn’t understand it—you really need an advisor to understand how it works. And the idea is ridiculous—you can convert billions of dollars but there is an income cap if you want to contribute $5,000. You’d think the income cap would be on the big money”.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt – the guy behind TTW...until next week.