Two things are inevitable: death and taxes. The
occurrence is certain; only the timing is unknown. The tax portion has some
implications that may affect future planning. Mr. Obama, in his 2017 budget
proposal, included items that would effectively increase the taxes Americans will
pay. While these items have not been implemented (yet), it does provide
information for guidance in the future. The proposals include the following:
Excess Accumulations
Under Mr. Obama’s proposal, an individual would not be
allowed to make tax deferred contributions to an IRA or defined contribution
(i.e. 401(k), etc.) plan if the amount in the plan could produce an annual
benefit in excess of $210,000. A Treasury Department document explaining the
tax proposals in the budget stated “Such accumulations can be…in excess of
amounts needed to fund reasonable levels of consumption in retirement…” and
thus do not justify tax deferred treatment.
Inherited IRAs
Under current rules, an heir of an IRA can elect to
receive distributions from the IRA over the lifetime of that heir, effectively
“stretching” the distributions from the IRA over many years. This stretching
allows the IRA to continue earning tax deferred for (potentially) many years
and limiting tax payments to only taxes required on the amount withdrawn. The
White House proposal would require an IRA inherited by anyone other than the surviving spouse to
withdraw all proceeds from the IRA over a maximum of 5 years (and pay taxes on
the withdrawals, of course).
Mandatory Roth IRA Distributions
Roth IRA contributions are made with after tax dollars;
earnings accumulate tax free and there is no required minimum distribution
under current rules. Two changes are proposed here: 1) minimum distributions
beginning at age 70 ½ would be required (just as with regular IRAs), and 2) no
additional contributions would be allowed after age 70 ½.
“Back Door” Roth IRA
Contributions
Currently, Roth IRA contributions are not allowed for
individuals making more than $132,000 annually for singles ($194,000 for
couples) in 2016. However, individuals can open a regular IRA with non-deductible
contributions and immediately roll the funds into a Roth IRA. That process
effectively allows high income individuals to contribute to a Roth IRA
regardless of the income level. The budget proposal effectively prohibits this
practice in the future.
Net Unrealized
Appreciation on Employer Stock
Retiring employees currently have the option of taking
employer stock from a company plan at retirement. Their tax liability (as
ordinary income) is based on the original cost of the stock to the employer
plan. If the stock is held for a year or longer, the excess of the sale price
above the plan cost (the net unrealized appreciation) is taxed at the more
favorable long term capital gains rate. The budget proposal eliminates that
option for employees under age 50 as of 12-31-16.
Other Items
While not included in the budget plan, there have been
other tax measures discussed which affect investors. One is a “transfer fee” on
securities transactions i.e. a tax on each security purchase and sale. I
imagine the rhetoric will be couched in terms of affecting the only the wealthy
and “hedge fund managers,” however; such a tax would also affect mutual funds.
Those funds are the investment vehicle of most middle class investors and are
the bulk of investments for 401(k), 403(b), etc. plans. It thus appears that
such a tax would have a much wider impact on more Americans.
Income taxes have long been a favorite vehicle for
raising revenue. Another item has been discussed—a wealth tax. Such a tax would
be applied to the assets the investor owns. The amount and the frequency of
collection (annually??) have yet to be determined. It will be interesting to
see if such a proposal again appears.
In this political climate of “fair share” and “income
inequality,” one can anticipate some tax changes will be forthcoming. We, at
Paragon Financial Advisors, assist our clients in managing their financial
assets in a changing tax world. Specific
actions should be discussed with your CPA to ensure appropriateness in your individual
circumstances, but let’s try to delay both death and taxes. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
