Several important loopholes for maximizing retirement income appear to be making their way onto the chopping block of future congressional legislation. These tax-saving and retirement income maximizing strategies involve both saving towards and funding retirement. With the current administration and congressional members considering their closure, the time may be right to take advantage of these opportunities. This month, Philly Voice took an in-depth look in their Personal Finance column at a few of the most popular loopholes.
Back-door Roth IRA Conversions
If your income is too high to make contributions of after-tax money into a Roth IRA, this loophole allows you to circumvent that restriction. It’s done by funding a traditional IRA with a nondeductible contribution and then immediately converting it to a Roth IRA following the initial funding. This allows your money to grow tax-free even though your income is too high to contribute directly to a Roth IRA. Since there are no income restrictions on IRA conversions this strategy allows high earners to take advantage of a Roth IRA’s tax benefits. President Obama’s 2016 budget proposal recommends that all Roth IRA conversions be limited exclusively to pre-tax funds. If this proposal was adopted by Congress, nearly all back-door Roths would become a thing of the past.
The Stretch IRA
Under current tax law, if you inherit an IRA you have the option to take distributions from the account spread over your lifetime. This allows well-funded families to convert a traditional IRA to a Roth and provide tax-free money to their heirs for life. Current tax-related proposals in Congress have included language that would end the stretch IRA by requiring anyone inheriting one other than a spouse to withdrawn all of the funds within 5 years.
“Claim Now, Claim More Later” & “File And Suspend”
Married couples currently have the option to claim their own social security benefits or up to half of their spouse’s. The “claim now, claim more later” works when one spouse claims half of the other spouse’s benefit at age 66, the current age for full retirement. Then at age 70, the individual claims his or her own benefit, which at that time has reached its maximum amount.
The “file and suspend” technique is typically used alongside the “claim now, claim more later” strategy. That’s because, in order for someone to claim a spousal benefit, the spouse has to have already filed for their own benefit. “File and suspend” involves one spouse filing for his or her own benefits and then immediately suspending the application. This defers the benefit to allow it to grow, while allowing their partner to claim half of the benefit amount as a spousal benefit. Along with back-door Roth IRAs, aggressive social security strategies were recommended for elimination in President Obama’s current budget proposal.
If you’re considering any of the above strategies as part of your retirement or legacy-planning, now may be the time to act, since the strategies discussed above have all been proposed for elimination with potential upcoming legislation.