“Harmonize” the RMD rules for Roth IRAs and other retirement accounts

“Harmonize” the RMD rules for Roth IRAs and other retirement accounts

According to the President, it’s time “Harmonize” the RMD rules for Roth IRAs and other retirement accountsYikes.  That could place many planning decisions, like Roth conversions, in jeopardy.

Yesterday, President Obama unveiled the Fiscal 2015 budget. Many of the proposals relating to retirement and financial planning are repeats from previous years.  Because of Congressional gridlock, very little gets passed.

Nevertheless, it’s important to know retirement account provisions included in the budget, because they are an indication as to where the administration wants to go.

“Harmonizing” the RMD rules for Roth IRAs is a new one.  Under the premise of simplifying the rules for retirement accounts, the President’s budget calls for a provision that would require Roth IRAs to follow the same required minimum distribution (RMD) rules as other retirement accounts. In other words, you would have to begin taking RMDs from your Roth IRA when you turn 70 ½. If this passes, it’s a game-changer for retirement planning.

No RMDs is a key reasons many people decide to contribute or convert to Roth IRAs. If this proposal were to become law, conversions may become extinct.

Right now, Roth’s grow tax-free and distributions come out tax-free. It truly is one of the best gifts in the tax code.  As a Certified Financial Planner®, I often get the question, “what happens if the Government changes the rule.”  Historically, taxpayers are usually grandfathered. So we’ll have to wait and see how this proposal goes.

As the saying goes, you can always be certain of death and taxes. Trusting the government to keep their word on Roth rules may be like playing Monopoly with folks that like to change the rules.  Bottom line, we’ll have to see how this one plays out.