Senator Wyden Proposes Major IRA Changes

• September 9, 2016
• Paul Neiffer

Senator Ron Wyden (D-OR) is the leading Democrat on the Senate Finance Committee and just released some proposals on changes to IRAs and ROTH IRAs.  Some of them are good and some not so good (excuse the English).  The changes are as follows (I will label each as GOOD or BAD at the end of each proposal):

• Making the Saver’s Credit refundable and requiring the credit to be paid into your retirement account.  Essentially, for lower-income taxpayers who contribute to an IRA and pension plan, the government will match up to $500 directly into your account – GOOD.
• Repeal the maximum age for making IRA contributions.  Currently, age 70 1/2 is the cutoff.  Mr. Wyden proposes eliminating this age completely.  This means as long as you have earned income, you can make a contribution – GOOD.
• Allow all inherited plan and IRA balances to be rolled over within 60 days.  Currently, this option exists for spouses, but non-spouse beneficiaries were excluded – GOOD.
• Allow employers to make retirement matching contributions for student loan repayments.  Employees with student loans sometimes have difficulty making contributions to 401k plans.  This provision allows the employer to make “matching” contributions on behalf of these employees.   The proposal pretends that the student loan payment was actually a 401k contribution by the employee and then the employer makes a match based on that contribution amount (GOOD for Employee – Perhaps BAD for Employer).
• Eliminate the Mega Roth IRA.  It would eliminate any additional contributions once a Roth IRA has more than $5 million or the balance as of December 31, 2016 (whichever is greater). (GOOD or BAD depending on your perspective).
• Eliminate Roth Conversions.  This would essentially bring back the income limits under the old Roth IRA rules.  This proposal is designed to eliminate the “back door” ROTH contribution.  (BAD for high income earners – Minimal effect on lower-income earners).
• Apply Lifetime Required Minimum Distribution Rules to Roth IRAs.  This would match up the rules with regular IRAs.  (BAD for most).
• Increase the required minimum distribution (RMD) age from 70 1/2 to 71 in 2018, 72 in 2023 and 73 in 2028 (and thereafter).  Age 70 1/2 was placed into effect in the early 1960s and never updated.  Plus trying remember when you turn a 1/2 year can be a pain (GOOD).
• Requiring no RMD if your total IRA values are less than $150,000.  This would allow taxpayers with lower balances to keep compounding their funds on a tax-deferred basis (GOOD).
• Elimination of Stretch IRAs.  Under current rules, many taxpayers appoint a very young person as their beneficiary of an IRA.  When they pass away, this allows the IRA distributions to be “stretched out” over many years or decades.  The new proposal would eliminate this option and require the funds to be distributed within five years.  Certain exceptions would be made for beneficiaries within 10 years of the IRA holder, an individual with special needs, a minor, or the account holder’s spouse.  As usual, they state this is designed to close an estate-tax planning loophole (not sure how it is a loophole when they made the law originally to allow this, but I digress) (BAD for all taxpayers).
• Address valuation concerns.  Indicates that an IRA cannot purchase anything for less than fair market value.  Also requires a qualified appraisal for all non publicly traded assets.  This would likely make investing in farm land more expensive on an annual basis (GOOD and BAD).
• Extend the statute of limitations from three years to six years.  This would give the IRS more time to pursue valuation misreporting and prohibited transactions (GOOD or BAD depending on your perspective).
• Strengthen rules disallowing investment of IRA assets in entities in which the owner has a “controlling” interest.  Current law allows these investments as long as you own less than 50%.  New proposal drops that to 10% and brings in related party rules (BAD).

It is likely that not all (or even any) of these proposals will pass.  However, it is important to note the tenor of these proposals.  Both Democrats and Republicans want more savings for Americans.  However, the perception by many in Congress is that most of the savings under IRAs are going to the “wealthy”.  Therefore, these proposals are designed to close those “loopholes” that are going to the wealthy and provide more incentives for less wealthy Americans.

I must admit that I have been reluctant to advise on several of the current “ROTH” conversions where taxes are required to be paid up front.  My concern has always been that Congress would eventually change the rules and now we see where at least one highly ranking Senator would like to change the rules.

We will keep you posted.

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