Possible changes coming soon to your IRA

By - Last modified: May 3, 2013 at 10:33 AM

President Obama’s 2014 budget proposal contains some very interesting changes to the way you would have to handle your IRA in the future.

The administration has proposed changes to the amount of money one can save in their retirement accounts, the elimination of RMD’s for some, as well as a possible cancellation of the “stretch IRA.”

The proposal would limit the maximum amount of savings one can invest in all retirement plans to around $3 million. The exact dollar amount is not set, only the idea that one should not be able to save more money than what could fund a retirement income of not more than $250,000 per year. If we use annuity values for the calculation, it would equate to about $3 million this year.

It frightens me a little that the government is starting to not only limit the amount that one can save annually, but now they are saying how much we can save in total inside our retirement accounts -- and starting to dictate what a sufficient income is during retirement.

The budget also proposes that we eliminate the “stretch IRA.” The stretch IRA is a benefit to beneficiaries that allows them to take small distributions from their inherited IRA over their life expectancy, potentially reducing their tax burden.

The proposed law would force all the money out of an inherited IRA within five years. This might increase the taxes and essentially leave less to intended heirs. One reason why the government might want to do this is so that it could increase its revenue significantly. What concerns me is what appears to be a general lack of understanding of how this will affect the public.

The budget proposal does have a silver lining; there is a section that proposes the elimination of required minimum distributions for people whose IRA values do not exceed $75,000. This would allow individuals to choose not to take a distribution from their IRA if one is not needed. The change might keep taxes down for retirees and allow more money to pass on to the next generation.

Right now all of these are just proposals. These laws may never come to pass. What is important to recognize is that change is on the horizon. It is not “business as usual” in Washington.

Consequently, as investors, we need to realize that the way we have been saving may need to change today and change yet again in the future. What we have been doing for years may not work tomorrow, so now is the time to be proactive and get your financial house in order.