4 retirement account tax loopholes that could soon close

How to Slash Your Retirement Tax Bill
How to Slash Your Retirement Tax Bill

President Obama's 2017 budget proposal includes a number of changes to retirement accounts that the administration is calling "loophole closures". These retirement tax policies will result in a higher tax bill for the relatively small segment of the population that uses them. Here are several changes to retirement accounts in Obama's budget that will result in tax increases for some people.

[See: 10 Ways to Make Your 401(k) Balance Grow Faster.]

Five year rule for inherited retirement plans. When you inherit a 401(k) or IRA from someone other than your spouse, you have several distribution options under current tax law. One option is required minimum distributions that can be spread out over your lifetime. Under Obama's budget proposal, this distribution option would be reduced. The budget proposes decreasing the maximum distribution term for non-spouse retirement account beneficiaries to five years. Instead of paying the income tax due on retirement account distributions over 20 or 30 years, you could be required to pay it within five years. This change was calculated to reduce the federal deficit by 6.3 billion between 2017 and 2026.

No more backdoor Roth IRA contributions. Roth IRA contributions are permitted for individuals whose adjusted gross income is below $132,000, or married couples filing jointly who bring in $194,000 or less. However, there are no income limits on Roth IRA conversions. This has given rise to the backdoor Roth IRA contribution.

You can make a non-deductible contribution to a traditional IRA, and then roll it over into a Roth IRA. The 10 percent early withdrawal penalty is waived on these conversions, and since the traditional IRA wasn't tax deductible, there is no tax liability as a result of the rollover to the Roth IRA. This enables high earners to take advantage of the many benefits Roth IRAs provide. The President's budget, if adopted, would eliminate the 2010 legislation that made backdoor Roth IRAs possible. Only people who earn below the income limits would be eligible to make Roth IRA contributions. The White House estimates that this tax change will reduce the deficit by $251 million between 2017 and 2026.

[See: 10 Reasons to Save for Retirement in a Roth IRA.]

Limit the total accrual of tax-favored retirement benefits. Retirement accounts have annual contribution limits that restrict the amount that can be deposited in these tax-favored accounts. However, some wealthy individuals have managed to accumulate millions of dollars in retirement accounts that they are deferring paying tax on. Obama's budget proposes preventing wealthy individuals from using loopholes to accumulate huge amounts in tax-favored retirement accounts. This proposal is projected to save the federal government almost $30 billion between 2017 and 2026.

A higher tax rate on capital gains. All withdrawals from traditional retirement accounts are taxed at your regular income tax rate, regardless of what the money was invested in inside the account. However, outside of retirement accounts, long-term capital gains are currently taxed at a much lower rate than your ordinary income. The tax rate on most net capital gains is typically no higher than 15 percent for most taxpayers. Obama's budget proposes increasing the top tax rate on capital gains and dividends to 28 percent.

[See: How to Reduce Your Tax Bill by Saving for Retirement.]

Presidential budgets are seldom passed in their initial form. However, it's worth paying attention to the budget process if you are affected by any of these tax hikes. A letter to your elected representative could make a difference.

Related: 10 things we've all said while filing our taxes

Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.

Copyright 2015 U.S. News & World Report

Originally published
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.
Claiming Property Taxes on Your Tax Return
If you pay taxes on your personal property and real estate that you own, you payments may be deductible from your federal income tax bill. Most state and local tax authorities calculate property taxes based on the value of the homes located within their areas, and some agencies also tax personal property. If you pay either type of property tax, claiming the tax deduction is a simple matter of itemizing your deductions on Schedule A of Form 1040.
Read MoreBrought to you byTurboTax.com
When to File Taxes: Should You Always Try to Be Early?
While the most common advice is to file your taxes as early as possible, is that always the wisest choice? Depending on your situation, it might actually be more beneficial to wait in order to file the most accurate return. Here's what you need to know to decide when to file taxes.
Read MoreBrought to you byTurboTax.com
Driving for Lyft? Use This Tax Preparation Checklist
So, you decided to become your own boss (at least part-time) and start driving for a ride-sharing company like Lyft. Use the Lyft tax preparation checklist below to organize your income and deductions to make filing your taxes a breeze. Remember, not all items listed will apply to you, but it will give you a good idea on what you need to report as income and what you can claim as a deduction.
Read MoreBrought to you byTurboTax.com
Do You Pay Taxes on Investments? What You Need to Know
As you start to diversify your financial portfolio, you'll likely look into investing. But do you pay taxes on investments? How much should you plan to account for? Our guide outlines some important points you need to know so you can invest with peace of mind.
Read MoreBrought to you byTurboTax.com