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Making Sense of Obama’s Proposed Budget (Part 2)

April 28, 2015

Earlier this year, President Obama unveiled 2016 budget proposals that are befuddling financial advisors, much less average people. While unlikely to be made law, I’ll attempt to make sense of them in this blog mini-series. Less than $100,000: No Required Distributions

This is actually good, as it removes the distribution requirement from tax-favored retirement accounts with less than $100,000 in assets.


Why require withdrawals, and the potential complexity associated with them, on people with relatively small nest eggs?


While such people may actually need required minimum distributions (RMDs) the most, I favor freedom of economic choice.


28% max benefit


President Obama wants to create a 28% maximum tax benefit for retirement plan contributions. So those in higher income tax brackets (33% and up) wouldn’t receive a full tax deduction for retirement contributions.


This is basically a tax hike on large earners – one that comes with a high compliance burden for retirees and unanswered questions for employer-sponsored retirement plans.


Limited Savings


This proposal would prevent retirement savings above a “cap,” which would be around $3.4 million – enough to afford a joint and 100% survivor annuity of $210,000 at age 62. The cap is soft, allowing for retirement savings earnings and cost of living adjustments to exceed the cap.


With Americans saving less than 6% of their disposable income, I’m not sure it makes sense to limit retirement contributions. If you have more than the cap, what do you do? What if 2008 happens again? How is this freedom?


No More “Stretch”


While there are certain exceptions, this proposal would make most non-spouse beneficiaries exhaust inherited retirement accounts within five years.


This effectively ends the “stretch IRA,” which let beneficiaries stretch the tax liability and withdrawals of an inherited retirement account over their lifetimes, and compresses the time for paying taxes.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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