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President Proposes IRA Changes

The president's proposals to cap retirement account contributions and scrap stretch IRAs don't hold water.

Natalie Choate, 05/10/2013

President Obama's budget for 2014 contains five proposed tax code changes that would directly impact our clients' retirement benefits. He would:

> Prohibit additional contributions to any IRA, 401(k) plan, or other defined contribution plan for an individual whose combined plan balances already exceed $3.4 million.

> Eliminate the "stretch" IRA concept by requiring a five-year maximum payout period for inherited retirement benefits.

> Limit the value of the tax deduction for contributions to retirement plans (among other deductions) to 28%, regardless of the individual's actual tax bracket.

> Eliminate the requirement of taking annual minimum distributions for an individual whose total account balances are under $75,000.

> Allow beneficiaries to do a "60-day rollover" for inherited retirement benefits.

The president's budget is sometimes considered a mere "wish list," and some of these proposals have appeared in President Obama's prior budgets without achieving enactment. Nevertheless it is useful to examine these ideas, since some of them may become law someday. I'll start here with the proposal to cap contributions and eliminate the stretch IRA concept.

Capping Contributions
The concept of this proposal (a new one that did not appear in the president's previous budgets) is simple and fair: Our law gives tax breaks to individuals to encourage them to save for retirement. Once a person has saved up plenty of money for his or her retirement through such tax-advantaged plans, we should stop offering tax incentives for that person to save even more. The person can save more if he or she wants to, but why should the taxpayers subsidize such further savings?

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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