With all the varying eligibility and tax-deduction rules out there, saving for retirement is often a confusing prospect. Now, after three years of work, Rep. Dave Camp (R-Mich.), the chairman of the Ways and Means Committee, has released his proposal for tax reform, and one of his plans for simplifying retirement savings is to prohibit new contributions to traditional IRAs and make the Roth the only IRA option.
Let's look at what the Camp Plan's proposals might mean for you.
The end of the traditional IRA?
Individual retirement accounts currently come in two flavors: traditional and Roth. Traditional IRAs allow your investments to grow tax-free until you withdraw them. Withdrawals are taxed as regular income, and contributions can be tax-deductible, depending on whether you have a retirement plan through work and on your income level.
Roth IRAs also let your investments grow tax-free, but contributions are never tax-deductible, and you can't use a Roth if your income is above a certain level. The benefit of a Roth is that withdrawals are tax-free as long as you meet certain requirements.
The Camp Plan would end new contributions to traditional IRAs and open up Roths to everyone. The reasoning is twofold: First, having two types of IRAs with lots of rules and complexities creates confusion and causes some people not to save at all. Second, many people with traditional IRAs don't realize they'll owe taxes when they begin their distributions, which means people end up having less for retirement than they thought they would.
The bottom line
Although people would lose a tool for retirement planning under the Camp Plan, a default option to the Roth IRA would simplify everybody's taxes and encourage more Americans to save for retirement. That's a winning option for anyone who's trying to ensure a comfortable retirement.
Get started investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
Find Dan Dzombak on Twitter, @DanDzombak, or on his Facebook page, DanDzombak. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.