Mar 13

What? First I told you that the 2015 Federal Budget proposed RMDs for the Roth IRA, and now I’m saying no RMDs at all. Well, sort of.

The proposal eliminates the RMD from tax favored accounts (IRAs, 401(k)s etc.) if the prior year end balance was $100K or lower. To add a bit of complexity, it’s not a step function, it phases over $100K – $110K, so if your balance were exactly $105K, half the RMD calculated must be taken. More complex? Ok, the numbers will be indexed for inflation.

My assessment of the impact of this proposal? Needless. I look at any changes to the code and ask who it will help and who will it hurt. This will benefit the rare individual who has a sub-$100K IRA, but no need to withdraw any money. When you consider this, it’s an odd combination. I’m not going to lose sleep over this, only observe that the addition of more rules is counterproductive, and I’ll be on the lookout for the unintended consequence that will result – a well meaning retiree hoping to keep her IRA in tact, and passing it on to her kids, who are in the 28% tax bracket, while she might have just taken her RMDs out at 15%.

On a lighter note, I started this series mentioning the Budget and the Treasury’s General Explanations. Today, I discovered another document in the series, the 1438 page Appendix.  A warning, it’s 13.2MB, so be patient if you are going to download it. It gave a remarkably in depth overview of where the money is going. Kind of like your household budget if you add quite a few zeroes.

More to come….

written by Joe \\ tags:

4 Responses to “2015 Federal Budget – No RMDs”

  1. Kathy Says:

    I suspect the proposal for RMDs on Roths is happening because the government feels too much money is being passed on to heirs tax free. By requiring RMDs the heirs won’t get as much and once taken out of the IRA, the cash will ultimately be spent or put into a taxable account. I’ve feared all along that the government is going to try to begin taxing Roth accounts some how or another and doing so will result in double taxation since the contributions are not made with pre-tax dollars.

  2. Joe Says:

    I don’t know if it will taxed, but I fear it will pull in Social Security taxation. Nearly as bad. Thanks for visiting and commenting.

  3. Dilip Sarwate Says:

    As someone approaching the age when RMDs will be required, let me point out another issue. Medicare is not free for all elderly people; IRMAA premiums for Medicare Parts B and D are required of people whose Modified AGI exceeds various levels. For example, for Single or HH filing status (in 2012), there is no premium (in 2014) for MAGI of $85K or less, and $54.10 total Medicare (monrhly) premium for MAGI in the range of $85,000.01 to $170,000.00. I will leave it to you to compute the effective marginal tax rate on that penny above $85K for those whose 2012 MAGI just barely exceeded $85K! Thus, RMDs (which increase AGI and hence MAGI) do not just pull in Social Security taxation as you point out here; they might increase the marginal tax rate too (as you have said earlier), and they might bring in Medicare premiums as well. Furthermore, they reduce the deductability of medical expenses for those who itemize deductions. The QCD rule for RMDs was a great way of reducing MAGI and thus avoiding some of these issues but alas, it has most likely gone the way of the dodo bird.

  4. Joe Says:

    Dilip – I know that there are other things to worry about. I became a bit obsessed with the Social Security taxation as I discovered its effect while doing my mother in law’s taxes years ago. And now that my wife and I are semi-retired, it seems I should start planning now to minimize that impact.

    Note to readers – Dilip is a fellow frequent poster at Money.StackExchange, a site that has thousands of Q&A on the topic of personal finance. I’m proud to belong to the same circle as he. A very knowledgeable person.

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