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Will the Obama Budget Ruin Roth IRAs?

Roth IRAs are a useful way to save for retirement that millions of Americans use. But in President Obama's new budget proposal, changes to Roth IRAs could make them less valuable for investors.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the proposal to add required minimum distributions for Roth IRAs. Dan notes that currently, those who have traditional IRAs have to start taking minimum distributions when they reach age 70 1/2, but there's no requirement for Roth IRA holders. But the Obama budget would impose the same rules on Roth IRAs, forcing retirees to withdraw tax-free money from their accounts even if they don't need it. Dan points out that while the intent of IRAs was to use them for retirement, changing the rules after so many people counted on the current provisions in choosing to convert traditional IRAs to Roth IRAs isn't entirely fair. The real concern is that even bigger future changes to Roth IRAs could make them even less valuable for saving for retirement.

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Read/Post Comments (16) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2014, at 8:43 PM, jshaffer wrote:

    Looks like those of us who tried to save for our retirement are given another reason not to trust big government. More than likely any advantage gained with the ROTH will be wiped out or even worse made a loss compared to a regular IRA if this idea sees the light of day. It is time to be relentless with our law makers in protest to this idea.

  • Report this Comment On March 09, 2014, at 10:28 PM, KSredhead wrote:

    Makes keeping your retirement savings in cash under your mattress look better and better.

  • Report this Comment On March 09, 2014, at 10:56 PM, AnswerSeeker wrote:

    This ROTH proposal will get shot down by both parties. At least, I hope so.

    Another risk of ROTH IRAs that no one talks about is the mix of taxes received by the federal government. Right now, their primary sources are income taxes and Social Security/Medicare tax. If the government were to add a value added tax (VAT), which is a type of national sales tax, then the government could actually lower income taxes without decreasing their revenues.

    This is another reason why people should not put all of their retirement money in ROTHs.

    AnswerSeeker

  • Report this Comment On March 10, 2014, at 12:19 AM, ChrisC wrote:

    Big flippin deal. So, if I have to take some money from my Roth at 70. It just goes into a taxable account. I still don't pay tax on the distribution. Must pay tax on investment earnings going forward. Even if this were to pass, this doesn't change my view of the advantages of a Roth.

  • Report this Comment On March 10, 2014, at 12:51 AM, Ardadius wrote:

    obama's War on Seniors continues. Every Senior needs to get out and vote this year and send the plutocrats in DC a message, that they won't take this anymore!

  • Report this Comment On March 10, 2014, at 8:46 AM, inparadise wrote:

    Other than eliminating the psychological barrier making it harder to take funds out of an account that you worked so hard to put them into, I don't see much of a benefit to the gov't to push this through. This may make it easier for the elderly to spend their Roth, which for some may increase their risk of outliving their money. I don't see that as a plus for the Feds. For those of us who are Foolish enough to not spend money just because it is there, the extra will wind up in a stock or stock fund that we will only pay a reduced capital gain on upon sale, if that, and then be inherited with stepped up basis anyway. Inherited Roth accounts already require an RMD, so even IF this goes through, it doesn't change our plans.

  • Report this Comment On March 10, 2014, at 10:48 AM, dbtuner wrote:

    I think the intent of this is to get this money into the Estate Tax. I thought Roth money is passed on Tax Free outside of the Estate tax.

    If you have to withdraw funds, it adds more money to your estate.

  • Report this Comment On March 10, 2014, at 10:55 AM, repete66211 wrote:

    RMDs are what maybe 4% of an account? And since it's a tax free distribution what's the big deal? And considering every other retirement account has RMDs, this is less of a big change than it is a correction.

    This is only an issue for people who have money coming out of their ears. In other words, people who are about last in line for my sympathy.

  • Report this Comment On March 10, 2014, at 12:01 PM, cornsilk2014 wrote:

    iam a widow i have 2 disable kids i thing they ought to and more fmps

  • Report this Comment On March 10, 2014, at 12:56 PM, sabebrush6 wrote:

    Costa Rica is looking better and better.

    How much damage to this country can Obama do before someone stops him ?

  • Report this Comment On March 10, 2014, at 3:55 PM, mdk0611 wrote:

    Roth balances ARE subject to the estate tax. But as the exemption amount for the estate tax at the federal level is now over $5.3 million, very few are affected by that.

    Not a big deal, but perhaps an indicator of more damaging changes to come.

  • Report this Comment On March 10, 2014, at 4:45 PM, JRobertHanson wrote:

    "changing the rules after so many people counted on the current provisions in choosing to convert traditional IRAs to Roth IRAs isn't entirely fair."

    You cannot trust this president!

  • Report this Comment On March 10, 2014, at 6:59 PM, miteycasey wrote:

    There goes government...changing the rules again.

  • Report this Comment On March 11, 2014, at 12:42 AM, sharron wrote:

    I agree this will be shot down for now. However, the beast is hungry and must be fed. They will keep trying until they get this and much more. I am 64 and have saved, invested and been frugal and careful in my investing. Vote these socialist out of office.

  • Report this Comment On March 11, 2014, at 1:10 PM, czr wrote:

    Couldn't you just take the newly enforced RMD and plow $6,500 or whatever the Max is back into the ROTH IRA if you qualify? Worst case scenario you can't and then you put it into a standard taxable account or even buy tax-free bons? No biggie. Just makes you think about it but the government doesn't just 'take it'.

  • Report this Comment On March 14, 2014, at 5:47 AM, SJLeftHand wrote:

    Political gridlock in Washington, D.C. is a good thing. President Obama will be out of office on January 20, 2017. In the meantime, perhaps the Republican Party will take over the United States Senate just as the Republican Party took over the House of Representatives in January 2011.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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