Obama's Budget Threatens Retirement Tax Breaks

The "Backdoor" Roth IRA

As long as you have earned income from a job or self-employment, and you are under age 70 1/2, you can contribute to a traditional IRA. But Congress closes the door on contributions to Roth IRAs if your income is "too high." The law gradually phases out the right to contribute to a Roth in 2016 as adjusted gross income on a single return rises between $117,000 and $132,000. For married couples filing jointly, the phaseout range is $184,000 to $194,000.

But there's a way for high earners to skip around the limit: the backdoor Roth. You make nondeductible contributions to a traditional IRA and then convert that amount to a Roth. It can be tricky, but profitable, and it's perfectly legal since Congress removed an income cap on Roth conversions. But a section of the President's budget called "loophole closers" would eliminate this opportunity by blocking the conversion of any nondeductible contributions to a Roth. If you're interested in this opportunity, be sure to slip through the backdoor while it's still open.

• SEE ALSO: New Path to a Tax-Free Roth Conversion

Roth Contributions After Age 70

The law forbids folks over age 70 1/2 to contribute to a traditional IRA, even if they're still working. But there's no age limit for pouring cash into a Roth IRA. As long as you have earned income, you can stash some of it (up to $6,500 a year for those age 50 and older) in a Roth tax shelter. Septuagenarians take note: By calling for the elimination of this opportunity, the President's budget highlights what a good deal it can be for older workers.

• SEE ALSO: The Age Cutoff for IRA Contributions

The Stretch IRA

When someone is named a beneficiary of an IRA, he or she may stretch withdrawals from the inherited account over his or her life expectancy. Many advisers promote this "stretch IRA" as a terrific opportunity for long-term, tax-sheltered growth and encourage beneficiaries to keep the tax shelter going as long as possible.

The President's budget, though, wants to put an end to this in most cases, arguing that the IRA was designed for the owner's retirement security, not as a tax shelter for heirs. Under the proposal, most IRA beneficiaries would be required to clean out the account by the end of the fifth year after the death of the original owner. (As under current law, most payouts from traditional IRAs would be taxable; those from Roth IRAs would be tax-free.) Widows and widowers of the original owner would still be allowed to stretch withdrawals over their life expectancies. The President's desire to eliminate the stretch IRA is a reminder of how beneficial it can be for many heirs.

• SEE ALSO: IRA Heirs Beware Mistakes

Unlimited Cash in Retirement Accounts

Who'd have thought you could save too much for retirement? The law now sets an annual maximum of $210,000 that anyone who starts receiving benefits between ages 62 and 65 may be paid by a defined-benefit pension plan. But there's no limit on how much you can rack up in various defined-contribution plans, including IRAs, 401(k)s and various plans for the self-employed.

The President's budget would change that and limit how much you can build up in such retirement tax shelters. The cap would equal the amount it would cost to buy an annuity at age 62 to pay you the defined-benefit maximum for the rest of your life. Right now, the budget says, that limit would work out to about $3.4 million. Once the total in your accounts hit that level, you would be forbidden to add to them. But the limit is not in effect yet, and if you have more than the cap if and when a crackdown occurs, investment gains on the balance would continue to grow tax-deferred.

• SEE ALSO: Retirement Plans for Workers Who Don't Have a 401(k)

No Mandatory Withdrawals From Roth IRAs

Unlike traditional IRAs, from which owners must start taking withdrawals at age 70 1/2, owners of Roth IRAs never have to withdraw any money. If they don't need the cash, they can let it build up tax-free for their heirs.

The President's budget wants to end this discrepancy by applying the required minimum distribution (RMD) rules to Roth IRAs. The Roth payouts would still be tax-free, but if owners shifted the money to taxable accounts, the government would get to tax future earnings. On the bright side, the budget proposes eliminating RMDs for any IRA with a balance of $100,000 or less.

• SEE ALSO: 10 Things Boomers Must Know About RMDs From IRAs

Company-Stock Rollovers

The law includes a break that pays off for some workers with a large stash of appreciated company stock in their retirement accounts. When they leave the firm, they can split their payout into two parts, with the company stock going to a taxable brokerage account and the rest to an IRA. The money that goes to the IRA remains tax-free until it is withdrawn, but the company stock portion is taxed. But here's the break: The tax is based on the value of the stock when it went into the retirement account. The appreciation isn't taxed until the stock is ultimately sold in the brokerage account -- and at that point, the profit is taxed at the lower rate reserved for long-term capital gains. When a lot of "net unrealized appreciation," or NUA, is involved, this can be a real money-saver. The President's budget would end the NUA break, but only for workers under age 50.

• SEE ALSO: Check Options Before Rolling Over a 401(k)

The Tax-Saving Power of Retirement Savings

The President's budget calls for capping the value of various tax breaks at 28%, putting the squeeze on folks in higher tax brackets -- namely, taxpayers with 2016 taxable income over $190,150 on a single return or $231,450 on a joint return. If this change were implemented, it would mean, for example, that the maximum value of a $20,000 contribution to a 401(k) plan would drop from $7,920 (the current savings for someone in the top 39.6% bracket) to $5,600 (the 28% maximum value). Unless and until the change happens, though, 401(k) and IRA contributions can be valued in your top tax bracket.

• SEE ALSO: Tax Planning for Retirement