The House of Representatives recently passed a bill that would reverse tax incentives for individual retirement accounts (IRAs). This move has caused concern among many Americans who rely on these accounts to save for their retirement. Here’s what you need to know about the proposed changes and how they could affect your retirement savings.
What are the current tax incentives for IRAs?
Currently, contributions to traditional IRAs are tax-deductible, meaning that you can deduct the amount you contribute from your taxable income. This reduces your overall tax bill for the year. Additionally, any earnings on your IRA investments grow tax-free until you withdraw them in retirement. At that point, you pay taxes on the withdrawals at your ordinary income tax rate.
Roth IRAs work a bit differently. Contributions to Roth IRAs are made with after-tax dollars, so you don’t get a tax deduction for them. However, any earnings on your investments grow tax-free, and withdrawals in retirement are also tax-free.
What changes are being proposed?
The bill passed by the House of Representatives would eliminate the tax deduction for traditional IRA contributions for high earners. Specifically, individuals with an adjusted gross income (AGI) of $400,000 or more ($450,000 or more for married couples filing jointly) would no longer be able to deduct their contributions. This would effectively make traditional IRAs less attractive for high earners.
The bill would also require distributions from inherited IRAs to be taken within 10 years of the original owner’s death. Currently, beneficiaries can stretch out distributions over their lifetimes, which can help minimize taxes. This change would accelerate the tax liability for inherited IRAs.
Finally, the bill would require Roth IRA contributions to be made with pre-tax dollars, effectively eliminating the tax-free growth and withdrawals that make Roth IRAs so attractive.
How could these changes affect your retirement savings?
If you’re a high earner who currently takes advantage of the tax deduction for traditional IRA contributions, this change could make it less appealing to contribute to an IRA. You may need to explore other retirement savings options, such as a 401(k) or a taxable brokerage account.
The change to inherited IRAs could also have a significant impact on your estate planning. If you were planning to leave an IRA to your heirs, they may now face a larger tax bill if they have to take distributions within 10 years of your death. You may need to revisit your estate plan and consider other strategies for passing on your assets tax-efficiently.
Finally, the change to Roth IRA contributions could make it less attractive to contribute to a Roth IRA. If you’re currently contributing to a Roth IRA, you may want to consider whether it still makes sense for your situation.
What’s next?
The bill passed by the House of Representatives still needs to be approved by the Senate and signed into law by the President before it takes effect. It’s possible that the final version of the bill could look different from what was passed by the House. However, it’s important to stay informed about these proposed changes and how they could affect your retirement savings. Consider consulting with a financial advisor or tax professional to help you navigate these changes and make informed decisions about your retirement planning.
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