4 retirement account tax loopholes that could soon close

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

10 things we've all said while filing our taxes
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4 retirement account tax loopholes that could soon close

"It's only January, I have plenty of time!"
You're relaxed, you're casual, what even are taxes anyway? You don't care! It's so far away that filing taxes isn't even remotely on your radar, to be honest.

Photo credit: Getty

"The imminent act of filing is upon me and I literally have nothing ready..."
Tax season is now approaching and that creeping anxiety about getting everything done on time is starting to set in. It's essentially biting at your heels and you know you have to get moving.

Photo credit: Getty

No words. Just emotional paralysis.
You're screwed. You need to start doing your paperwork but you physically do not know where to even begin. It's time. It's happening.

Photo credit: Getty

That anxiety you felt creeping in earlier? Now it's full-fledged onset. This stage is often accompanied by screaming out loud, pulling hair, crying, etc.

Photo credit: Getty

"Wait, did I get all of my papers in? Did I check that one box correctly? Does it look like I'm trying to evade some of these taxes? What if I go to jail? Can I go to jail for that? WHO WILL FEED MY DOG WHEN I AM IN JAIL?!"

It's like handing in an exam in school and wishing you could grab it back and double check your answers one more time.

Who was that celebrity you heard about that went to jail for tax evasion? Because now you're convinced that's totally going to be you.

Spoiler alert: as long as you did everything to the best of your knowledge and ability, you probably won't go to jail. And even if you do, you'll find someone to walk your dog.

Photo credit: Getty

"I got this, I'm almost done, a few more papers and I'm in the clear. I just have to pound through the rest of it. Go me!"

"Go you" is right! Now you're on cruise control and you're on track to get everything done well and on time. You're unstoppable in the delight of the world that is tax filing.

Photo credit: Getty

"Thank god that's over with, now I can relax! What to do with all this stress-free free time!"
Finally, relief. Your papers are filed and sent out into the universe. It's off your back at last. Now on to more important things, like Netflix.

Photo credit: Getty

"When is my return coming? Is this going to be my life for the rest of my life? Yep, it is. So about that return..."
Now, you wait. You want that money. And the inevitable truth that your life will now be a neverending cycle of filing taxes and waiting for your return.

Photo credit: Getty

"SCORE my return was so much better than I expected! I'm buying a new dress. Or five. Probably five, why not?"
You're on a total life-high now. The possibilities of what you can spend your return on seem endless and even if you don't, having a nice bonus hunk of cash in your pocket feels pretty good. It made all of that stress completely worth it.

Photo credit: Getty

"Honestly filing wasn't even that bad this year. And now I don't have to think about it anymore. Well at least not for another year. But no use in worrying about that now!"
Alas, acceptance. You know you'll fall victim to the vicious cycle again when next year rolls around. But truthfully, you wouldn't have it any other way. Okay, you obviously would. But you'll never change your procrastinating ways!

Photo credit: Getty


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

Copyright 2015 U.S. News & World Report

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