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 But as often happens when too many people make use of such
shortcuts, the government may move to close three retirement
loopholes that have become increasingly popular as financial
advisers have learned how to exploit kinks in the law.
1. Back-door Roth IRA conversions
The U.S. Congress created this particular loophole by lifting income
restrictions from conversions from a traditional Individual
Retirement Account (IRA) to a Roth IRA, but not listing these
restrictions from the contributions to the accounts.
People whose incomes are too high to put after-tax money directly
into a Roth, where the growth is tax-free, can instead fund a
traditional IRA with a nondeductible contribution and shortly
thereafter convert the IRA to a Roth.
Taxes are typically due in a Roth conversion, but this technique
will not trigger much, if any, tax bill if the contributor does not
have other money in an IRA.
President Obama's 2016 budget proposal suggests that future Roth
conversions be limited to pre-tax money only, effectively killing
most back-door Roths.
Congressional gridlock, though, means action is not likely until the
next administration takes over, said financial planner and enrolled
agent Francis St. Onge with Total Financial Planning in Brighton,
Michigan. He doubts any tax change would be retroactive, which means
the window for doing back-door Roths is likely to remain open for
awhile.
"It would create too much turmoil if they forced people to undo
them," says St. Onge.
2. The stretch IRA
People who inherit an IRA have the option of taking distributions
over their lifetimes. Wealthy families that convert IRAs to Roths
can potentially provide tax-free income to their heirs for decades,
since Roth withdrawals are typically not taxed.
That bothers lawmakers across the political spectrum who think
retirement funds should be for retirement - not a bonanza for
inheritors.
"Congress never imagined the IRA to be an estate-planning vehicle,"
said Ed Slott, a certified public accountant and author of "Ed
Slott's 2015 Retirement Decisions Guide."
Most recent tax-related bills have included a provision to kill the
stretch IRA and replace it with a law requiring beneficiaries other
than spouses to withdraw the money within five years.
Anyone contemplating a Roth conversion for the benefit of heirs
should evaluate whether the strategy makes sense if those heirs have
to withdraw the money within five years, Slott said.
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3. "Aggressive" strategies for Social Security
Obama's budget also proposed to eliminate "aggressive" Social
Security claiming strategies, which it said allow upper-income
beneficiaries to manipulate the timing of collection of Social
Security benefits in order to maximize delayed retirement credits.
Obama did not specify which strategies, but retirement experts said
he is likely referring to the "file and suspend" and "claim now,
claim more later" techniques.
Married people can claim a benefit based on their own work record or
a spousal benefit of up to half their partner's benefit. Dual-earner
couples may profit by doing both.
People who choose a spousal benefit at full retirement age
(currently 66) can later switch to their own benefit when it maxes
out at age 70 - known as the "claim now, claim more later" approach
that can boost a couple's lifetime Social Security payout by tens of
thousands of dollars.
The "file and suspend" technique can be used in conjunction with
this strategy or on its own. Typically one member of a couple has to
file for retirement benefits for the other partner to get a spousal
benefit.
Someone who reaches full retirement age also has the option of
applying for Social Security and then immediately suspending the
application so that the benefit continues to grow, while allowing a
spouse to claim a spousal benefit.
People close to retirement need not worry, said Boston University
economist Laurence Kotlikoff, who wrote the bestseller "Get What's
Yours: The Secrets to Maxing Out Social Security."
"I don't see them ever taking anything away that they've already
given," Kotlikoff said. "If they do something, they'll have to phase
it in."
(Editing by Beth Pinsker and G Crosse)
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