You know the routine; you make money, you save money. And so many of us are using tax-advantaged vehicles like Traditional IRAs and Roth IRAs in addition to your workplace retirement plans.
It’s great that there’s vehicles that incentivize retirement savings, but just know what the government gives with one hand, they take with the other, as we’ll be diving in and exploring here.
Brett writes in: “Hi Mike, thank you for what you do. I’m sure you’ve been reading the news about the IRA rules and I was wondering if you could explain to me what is happening and if this will affect the money I have in my Roth IRA. Thanks!”
Great question, Brett. Nothing has been put into place yet, although these new bills regarding Traditional IRAs seem likely to pass. As it is, if anyone other than a spouse inherits a Traditional IRA, they must take distributions from it, but they can stretch the payments over their lifetime using the IRS’ actuary tables. This is termed a ‘stretch IRA.’
Under the proposed rules, if this same event were to happen, the beneficiary would be forced to liquidate the IRA over a period of 10 years instead of their lifetime, greatly increasing the tax burden of every payment and possibly pushing the beneficiary into a higher tax bracket until the IRA is liquidated.
Another proposal is to increase the RMD age (the age where you are required to take Required Minimum Distributions) from 70 ½ to 72. This proposal is actually more beneficial to the taxpayer than the current rules. Again, where the government gives with one hand, they take with the other.
Now, Brett, this information is important to people with Traditional IRAs. You, however, have a Roth IRA and have already paid taxes on it when you put money into it, so the government is less concerned with regulations on the back-end.
Required Minimum Distributions do not apply to Roth IRAs, however, beneficiaries are required to take a minimum amount every year, so the new rules regarding stretch IRAs may apply to Roth IRAs as well. We will just have to wait and see for that.
I hope that clears that up a little bit and thank you for writing in, Brett.
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This article is not intended to be legal, tax, or financial advice. For help regarding your specific situation, please consult a local advisor.