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How Will Tax Reform Change Roth IRAs?

Last update on: Oct 24 2019

We haven’t seen details of a tax reform bill, but there are some persistent rumors.

One proposal is to reduce the Stretch Roth IRA. The Stretch Roth IRA is a great estate planning tool. You convert a traditional IRA to a Roth IRA, paying income taxes now and leaving your beneficiaries a tax-free source of income. They have to take required minimum distributions over their life expectancies,
but can let the bulk of the IRA continue compounding for their future needs. They also can draw money more quickly if needed.

The proposal would require all Roth IRA beneficiaries to distribute the balance of Roth IRAs within five years after inheriting. That’s not a big penalty. The money still will be tax-free when distributed and can be invested in taxable accounts. The downside is the future income and gains earned by those
accounts won’t be tax free. This proposal had support from members of both parties in recent years.

Another proposal, of course, is the potential reduction in tax rates. This wouldn’t directly affect roth iras. Tax rates changes, however, could reduce the advantages of IRA conversions and of using Roth IRAs and 401(k)s instead of the traditional accounts. Much depends on how much income tax rates decline and the difference between ordinary tax rates and those on long-term capital gains and qualified dividends.

I haven’t seen any serious proposals to reduce the tax-free status of Roth IRAs or apply RMDs to the original Roth IRA owners. In fact, there have been stories Congress might go in the opposite direction. It could eliminate the tax deductions and deferral of traditional IRAs and 401(k)s and essentially make all
retirement accounts like Roth accounts in the future.



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