NEW YORK (MainStreet) Everyone knows that changing the rules in the middle of the game is unfair. However, three proposals in President Obama's 2015 fiscal year budget could derail even the best retirement plans, according to Jamie Hopkins, associate director of The American College's Center for Retirement Income.
"These changes would benefit the government, but they could have a negative impact on investors and their plans for retirement," Hopkins said.
The changes have to do with Roth IRAs, traditional IRAs and Social Security benefits. Read on for more specifics and what you should know ahead of time, in the event that the changes are passed.
1. Required Minimum Distributions for Roth IRAs
In an effort to "harmonize" the required minimum distribution rules, one proposal in President Obama's 2015 budget would enforce required minimum distributions from Roth IRAs after the owner reaches age 70.5.
Unlike traditional IRAs and other retirement accounts, Roth IRAs currently provide a unique benefit in that they are not subject to the required minimum distribution rules.
"This change could be a significant problem if the individual's retirement plan was designed with the tax-free growth of the Roth IRA assets in mind," Hopkins said.
For individuals who use a Roth IRA as an account that they don't plan to tap into until their 80s or for those who use it as an estate planning type of strategy, this change can negatively impact their financial stability in retirement.
"Individuals could lose out on a lot of potential growth, and in some cases, they won't have enough money to meet their needs in retirement," Hopkins said.
Although there is little that financial advisors can do to mitigate the effects of this change, Hopkins notes that there is a possibility that existing Roth IRAs could be grandfathered in and be exempt from required minimum distribution rules. If this proves to be true, then it could be beneficial to set up a Roth IRA now, before any changes are passed, to reap the benefits and sidestep this change.
2. Cap on Wealth Inside an IRA
President Obama's 2015 fiscal budget also proposes to put a cap on IRAs, which would prohibit further contributions or accruals from being allowed into the IRA once the individual has enough assets for a "secure retirement," by the government's standards.
This would hit wealthiest Americans the hardest. It could severely limit rollover opportunities from company-sponsored retirement plans and remove some existing estate planning techniques currently afforded by IRAs, according to Hopkins.
"Some of these caps will naturally reduce the standard of living of retirees, particularly for high-net-worth individuals," Hopkins said.
While the proposed cap of roughly $3.2 million is high, the value of most qualified retirement plans would be aggregated together when determining the $3.2 million cap.
"Millionaires, especially, could find that they just cannot afford the same lifestyle into their retirement years if this change were to go through," Hopkins said.
3. Reduction in Social Security Benefits
This proposed change seeks to "eliminate aggressive Social Security-claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits," according to the 214-page document that outlines the $3.9 trillion 2015 budget.
Proposed reductions to Social Security benefits "could have a profound effect on well-informed middle and lower income families that are doing exactly what they are supposed to do," Hopkins said.
Although the language is vague as to which specific claiming strategies might be eliminated, the proposed changes leaves financial advisors mulling ways to replace Social Security benefits as a retirement income source.
"Whether it's a matter of putting more money into qualified plans, Roth IRAs or purchasing a deferred annuity, advisors are looking at strategies to make up for lost income from Social Security," Hopkins said.
--Written by Renee Morad for MainStreet