Possible Law Changes Beyond File and Suspend

Back in 1995, I subscribed to the big industry rag for stock brokers, Registered Rep Magazine.  Twenty years later, I still get the magazine, although I haven’t held a broker’s license (the Series 7) for more than a decade.

When I sat down to read it a few days ago, I was struck by one of the articles, which said that the popular Social Security maximization strategy, File and Suspend, was probably on the regulatory chopping block.  By the time the magazine made its way into my snail mail box, File and Suspend was gone (for more details, click here).

Given that the author pretty much nailed it, I was curious to see what else he thought faced regulatory risk.

For example, I had no idea that the ‘stretch IRA’ was on it’s last legs, as he says in the article.

When someone passes, the IRA can be passed down to the beneficiaries in the IRA form and the required minimum distributions are based on the beneficiary’s life expectancy, which usually means that there is probably a lot of tax-deferred growth for the assets.

Apparently, a phase out of the Stretch IRA has been attached to every recent tax bill.  According to IRA expert Ed Slott, who is quoted in the article, Congress never intended for IRAs to be used this way and that it was an IRS interpretation that permitted the strategy.  Now it may be on its way out.

The ‘backdoor’ Roth IRA contribution may get the ax soon too.  Right now, it’s possible to make a contribution to a regular IRA and then convert it to a Roth, which allows high income earners to get around the limits on Roth IRAs.

Congress may be less likely to close the ‘backdoor’ because it would mean giving up revenue today.  It should mean higher tax revenue down the road, but a bird in the hand may be worth more to Congress today.

I had never heard the term ‘RMD Harmonization,’ which refers to forcing Roth IRA owners to take distributions at 70 1/2, just like regular IRAs.  Contributions after 70 1/2 would be profited as they are with like regular IRAs.  The withdrawal would still be tax-free, but if the proceeds are invested in a table account, it would be subject to regular taxes.

The only good news in the article for savers is that Congress is apparently thinking about scrapping the aforementioned income limits on Roth IRA limits (so losing the back door wouldn’t be so bad).

All of these possible changes are a good reminder that the rules of the road change over time – sometimes for the better and sometimes for the worse.  A good strategy today might not work in the future (and vice versa).