Much of my industry revolves around understanding financially-related laws and how to navigate them. As you can imagine, there are several ways to maximize retirement benefits, many of which the government considers “loopholes.” Unfortunately, some of the most popular strategies are under threat from proposed legislation. Here are three that could be off limits in the future.
Backdoor Roth IRA Conversion
This strategy came into existence when the government lifted income restrictions on IRA conversions, but not the amount that can be contributed. There’s an immediate tax hit when converting, but for many, that’s a wise investment.
President Obama’s proposed 2016 budget seeks to limit Roth conversions to pre-tax money only, effectively killing the “backdoor” conversion.
Extending taxation on an IRA as long as possible can protect assets for generations. This tactic essentially involves bequeathing assets to very young people (i.e., grandchildren or great-grandchildren), and is referred to as the “stretch IRA”. Congress never imagined the IRA to be an estate planning tool. So the president’s proposed budget looks to end the “stretch” practice by requiring non-spouse beneficiaries to withdraw assets within five years of inheriting them.
Aggressive Social Security Strategies
Upper-income Social Security beneficiaries have long maximized their credits by manipulating their filing timing. Two popular strategies include “file and suspend” and “claim now, claim more later” (pdf), but Social Security reform threatens both of them. But if you’ve used one, don’t worry. It’s likely any changes will only affect those who file in the future.
The best way to handle this dynamic environment is to work with a trusted financial professional. As things continue to change, it’s valuable to have someone on your team who can help you achieve your financial goals while avoiding potential pitfalls.