President Obama’s proposed budget for 2016 shows that some retirement planning strategies have drawn the attention of the Federal government and may be subject to future legislative limitations.
The President’s proposed budget suggests that Roth IRA conversions be limited to only pre-tax contributions. This would effectively eliminate the “backdoor” Roth IRA conversions by which taxpayers whose income is too high to contribute pre-tax money into a Roth IRA instead contribute to a traditional IRA with after-tax money and then quickly convert to a Roth IRA.
Additionally, the proposed budget calls for the elimination of “aggressive” strategies for claiming Social Security benefits. The exact strategies at issue are not specified in the proposed budget, so professionals in the industry and those saving for retirement are left to speculate. Speculation has pointed to two particular techniques as those most likely to be addressed. The first, sometimes called the “claim now, claim more later” strategy involves married couples, often dual-earner couples, one spouse of which chooses to accept spousal benefits at full retirement age (age 66), then later switches to receive his or her own benefits when they max out at age 70. A second approach, sometimes called the “file and suspend” strategy, can be used in conjunction with the first. Because one member of a couple typically must file for retirement benefits in order for his or her spouse to claim a spousal benefit, some couples may have one spouse file for benefits at full retirement age, but then immediately suspend their own benefits, allowing the suspended benefits to grow while their spouse still claims a spousal benefit in the interim.
It should be noted that in the current congressional climate, it is unlikely any such proposals would be codified in the near future. It is also unclear how or if any such proposals could be given retroactive effect if they are implemented.
If you have legal questions about your retirement planning strategies, contact the Private Wealth professionals at BakerHostetler.