Retirement Planning and Obama’s 2016 Budget

President Obama’s 2016 budget was revealed to the public earlier this month, and according to the White House, a few of its main goals are to improve access to childcare and education, reform the tax code, ensure access to healthcare and support upward mobility. While backers also say the budget will make it easier to save for retirement, experts have mixed opinions on its potential effects on seniors.

A few of the more controversial proposals involve IRAs and Roth IRAs. For instance, the budget proposes to eliminate the “stretch” IRA, requiring most non-spousal beneficiaries to clean out their inherited accounts five years after the owner’s death. Without the ability to extend those distributions—something most inheritors do today—tax deferrals would be drastically reduced, and beneficiaries could be abruptly bumped into higher tax brackets and denied a variety of deductions. While this change would certainly save the government money on tax benefits that would have been above and beyond those promised to the account creators themselves, there’s no denying its negative impacts on inheritors.

On the other hand, the budget would also include a hardship exception to the typical ten percent penalty for early withdrawals. As it stands, the exception would cover people who’ve received unemployment for over 26 weeks, allowing them to withdraw up to $50,000 per year from IRAs and employer-sponsored plans. “I think this will probably pass because neither side of the House wants to strip out something that will help people in hardships,” said Brooks Stahlnecker of the Stahlnecker Group. “If anything, though, this will just create bigger hardships down the road, and people won’t have as much on the back end when they finally retire.”

In an effort to simplify the rules regarding required minimum distributions, the budget also proposes RMDs for Roth IRAs. “The Roth was brought about with no RMD, and lots of clients transitioning into it to leave money to the next generation,” said Stahlnecker. “The stated reason is to make it easier for people to understand the rules, but still they flip-flopped and want to strip the RMD for people with $100,000 or less in a qualified plan.” Overall, high wage earners who want to leave inheritances will be most affected, and they and their advisors may need to find new ways to set aside funds for the next generation.

Also a potential negative for high earners is the proposal to cap the deduction on tax-qualified contributions at 28 percent, disallowing those in higher tax brackets from taking the full deductions they currently enjoy. This measure would effectively put a cost basis on those contributions, creating a multitude of accounting complications. Investors who exceed that maximum deduction will “inevitably have to look at non-qualified investments, though there are still ways to make those tax-deferred,” said Stahlnecker.

Aside from the direct impacts on individuals’ retirement accounts, the budget could require businesses to offer automatic enrollment into payroll-deducted IRAs if they don’t already offer other plans. The current proposal is that money would be set aside to implement state-based auto-enrollment programs, and that tax credits would be offered to small businesses that participate. “The good thing about this is that the federal government is finally providing some backing to the idea, and it’s not going to cost the states themselves a whole lot,” said Jamie Hopkins, Associate Director of the New York Life Center for Retirement Income. “People will be able to opt out, but it will encourage more people to save.”