JoeTaxpayer

This proposed change to the tax code is a simplification, but at what cost? One bit of the proposal offers to eliminate RMDs on retirement account that are worth less than $100K. A good thing, I suppose, although those with a low IRA balance are also likely to be in such a low tax bracket that the withdrawal wont be a burden. The next part of this change is add RMD requirements to the Roth IRA. I have mixed feelings about this. One view is that retirement accounts are meant for just that, retirement. These accounts have morphed into estate planning tools, especially for those of modest means. The IRA offers a great way to pass your assets on to a loved one, bypassing probate, and in the case of the Roth IRA, doing so with no tax bill on withdrawal.

I’m neutral on this proposal. Of course the government sees it as way to raise money.

We continue our look at the proposed 2015 Government Budget, and today it’s one that is bound to impact people by surprise.

The proposal itself may seem well intended, at face value, it puts a limit on what one can accumulate in their retirement accounts. In light of the Mitt Romney $400M IRA, such proposals have gotten public approval. To be clear, it’s not the spirit of the proposal that I object to, but the math behind its implementation. Let me first offer the limits and how they will be calculated. First, an annual benefit of $210,000 has been deemed enough. For a single person with no deductions, he would clear about $160,000. This is top 10% or so, but not quite wealthy. The next step is to see that $3.2M at age 62 will buy an annuity which will return the $210K each year. That makes sense, but not everyone wants an annuity. $3.2M will provide $128,000 per year if we use the 4% withdrawal rule, and after tax, just under $100,000.

We are talking about age 62, and the proposed budget doesn’t go into detail, but a rate of return must be assumed to determine a present value. If we use 6%, a 32 year old will have a cap on his account of about $560K. Still a reasonable number, although you should keep in mind, the market isn’t consistent year after year. Million dollar 401(k) accounts dropped by half in the dotcom bubble in early 2000, and again in the bust of 2008. So, the employee of a high tech firm with a volatile stock can see years when he can’t contribute, and therefore cannot collect his company match, only to find a drop in value the next year that puts him below the limit. The limit is different for each person depending on their age, and will force a cumbersome set of calculations as multiple providers will need to report their year end balances for each participant.

Last, I see nothing in the proposal to distinguish between the calculations for a couple vs individual. This may be addressed in the final version of the budget or just left as individual limits, but either way, as it stands, the calculations are just this side of incomprehensible. And this doesn’t address the accounts that are already in the tens of millions, only the ability to deposit more money.

This is a change for the better that reverses a bit of tax code that never made sense to me. There is a loophole that taxes what you or I would look at as income to partners of an investment firm, and tax it at a capital gain rate. As the budget proposal states “Although profits interests are structured as partnership interests, the income allocable to such interests is received in connection with the performance of services. A service provider’s share of the income of a partnership attributable to a carried interest should be taxed as ordinary income and subject to self-employment tax because such income is derived from the performance of services.”

I was always in favor of closing this loophole. Let’s see if this budget ever passes.

I’ve been sifting through the proposed 2015 Government Budget and will complete the series in a seven day marathon, an article each day for the next seven days. The tax code is so complex that each bit ranges from applying to most of us, to code so specific, it might hit the top fraction of a percent. So please bare with me if the proposed code changes I’m highlighting have no interest for you.

You may know, the gift tax exclusion permits an individual to gift up to $14,000 each year to another person with no tax consequence. Even if you are not wealthy, when you reach an age that you realize you can’t take it with you, some people like the idea of handing out money to their loved ones each year. In some situations where it’s preferable not to have the recipient gain access to the money until they are adults, or even for adults, when they reach a certain age. This is often accomplished via a trust. The process itself is a bit convoluted. The deposit is made to the trust, and the beneficiary, in theory, is given brief access to the funds, but upon signing (or having their guardian sign) a Crummey Notice Letter, the gift to the trust is considered completed.

The proposed change to the code eliminates some of the paperwork, no more letters to deal with, but caps the gift amount to $50K per year via this method. The normal, real, immediate, $14,000 gifts are not impacted.

My view? This actually simplifies the tax code for many who wish to gift up to $50K per year to a small number of beneficiaries, and avoids the smoke and mirrors of the letter acknowledging the gift. I’m with any rules that help simplify the code.