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If your retirement money is in a traditional IRA or an employer-sponsored retirement plan like a 401(k), the government requires that you start taking distributions once you turn 70½ years old. But that's not the case with a tax-friendly Roth IRA, and that's been a big advantage for savers who want to use it later in life or pass it on to heirs.
"High-net worth people tend to use Roths as estate-planning tools. High-middle income people use Roths as part of their own retirement strategies," said Cathy Curtis, a certified financial planner and founder of the fee-only investment advisory firm Curtis Financial Planning. "It's been great that you can keep it growing forever. "
That would change under the provision in the administration's proposed 2016 budget, which would impose required minimum distributions (RMDs) for Roth IRAs in the same way they're imposed on other retirement accounts. That means that you'd need to take distributions from your Roth IRA once you turn 70½ as you would for your traditional IRA and other retirement accounts.
Chances of adoption: Not likely. Jeffrey Levine, an IRA technical consultant with Ed Slott & Co., calls this "a bait and switch" and "one of the most egregious proposals" in the budget. If it does come to pass, he suspects it will include a grandfather clause so that savers above a certain age will be exempt.
What advisors are saying: Consider your options, and don't let this dissuade you from maxing out your retirement contributions. "The RMD has to be one of the most frustrating, technically complicated government retirement provisions that's ever been created, and there's no reason to put this stressful burden on millions more people in their 70s," said "Smart Couples Finish Rich" author David Bach, vice chairman of Edelman Financial Services. "Anything we do to create barriers and complications around saving for retirement is a mistake. "
Certified financial planner Jon Teran recommends asking your financial planner to run multiple retirement scenarios in the event that this comes to pass. "What will your retirement portfolio look like, for example, if you have to keep transferring funds you may or may not need from your Roth IRA because of RMDs?" he said. "If you don't need to spend it, and choose to invest the RMD proceeds into a taxable brokerage account, now you are paying taxes on the capital gains and dividends going forward. How might this impact your retirement projections?"
For more information on other provisions that could affect you, click here.