Have you heard the expression, the devil is in the details? While that may sound sinister, it simply reminds us to look beyond the topline story to see what's really going on. President Obama's State of the Union speech is a case in point. The topline story was the focus on retirement, which we applauded, and the new myRA, which I wrote about previously.
The President's budget proposals, however, may reveal more about the administration's overall vision for retirement policy. Keep in mind that these are proposals; unlike myRA, which was launched by executive action, the proposals need to be passed by Congress. I'll leave it to others to handicap the odds. For now, let's take a look at some of the more noteworthy details:
Proposal: Harmonizing RMDs for Roth IRAs
Currently, Roth IRAs are not subject to required minimum distributions (RMD) until the death of the account holder, making them popular for estate planning. The Administration is proposing, however, that Roth IRAs be subject to the same RMD as most other retirement accounts. In other words, distributions would be required after age 70 1/2.
Proposal: 5-year Rule for Non-Spousal IRAs
Things would change for some distributions from traditional IRAs as well. With a few exceptions, IRAs inherited by a non-spouse would require full distribution within five years. Previously, the heirs could take distributions across their life expectancy.
Proposal: Capping Retirement Savings
This one may sound familiar since it received a lot of attention last year. It proposes a formula that would prevent additional contributions to retirement accounts after balances reach a certain limit, which would currently be about $3.2 million.
Proposal: Eliminate RMDs on Savings Less Than $100k
Failing to take an RMD leads to a harsh penalty - 50% of the shortfall. But the proposal would eliminate RMDs if the cumulative retirement account balance is under $100,000. This would help keep smaller balances in the system, giving accounts more time to grow.
Proposal: Mandatory Auto IRAs for Small Businesses
Businesses that are at least two years old with more than 10 employees would be required to auto-enroll employees into an IRA, assuming there is no existing workplace retirement plan. There would also be incentives for employers to offer a company-sponsored plan.
What's the devil in the details here? The first three proposals seem to be an attempt to limit the use of retirement accounts for estate planning or wealth transfer. That may or may not make sense from an overall budget perspective, but we need to ask if placing limits on retirement savings is the right message to send at a time when we are focused on getting people to save more.
The final two are more consistent with the Administrations' focus on retirement in that they are designed to help get people into the retirement system or help them stay in it. And that approach - getting people into the retirement system, making it easy for them to save, and encouraging them to stay - is one of the promising ways forward when it comes to solving the retirement crisis.
Chip Castille, Managing Director, is head of the BlackRock US Retirement Group. You can find more of his posts here.
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