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Don’t Change Tax Plans Based on Presidential Budgets

A reader writes in, asking:

“I heard on the radio recently that Obama will be changing IRA rules so that Roth IRAs will require RMDs and so there will be a limit on IRA account size. Do you think this has a big effect on the decision of which type of account to contribute to?”

To be clear, these are proposed changes that were included in the Obama Administration’s budget for the 2016 fiscal year. Every year, the President is required to submit a budget to Congress. And every year, the budget includes a list of tax changes — the nature of which naturally varies depending upon whether a Democrat or Republican is in office.

A key point, however, is that the President does not actually have the power to implement such changes to existing law.** For such a change to take effect, somebody would have to introduce a bill in the House of Representatives, where it would ultimately have to be passed. And the Senate would have to pass it as well. Then the President comes into play by signing the bill into law (or, in some cases, refusing to do so).

So, what ultimately ends up happening with most tax-related proposals in presidential budgets? Nothing. Most never even get introduced as bills. And, of those that do, many never get anywhere near becoming law. This is especially true in situations such as we have today in which the President is of one party and both houses of Congress are controlled by the other party. In fact, some ideas (the limit on retirement account sizes, for instance) have been proposed repeatedly without ever going anywhere.

From a civic duty perspective, it may be worth following such proposals so that you can contact your elected representatives to let them know whether (and why) you do or do not support various tax changes.

But from a financial planning perspective, if nobody has even introduced a bill yet, it’s far too early to start making any changes to your tax planning.

That said, you don’t want to bet everything on the idea that nothing will change. Tax law does change over time, which is why “tax diversification” — having some money in tax-deferred accounts and some money in Roth accounts — is generally considered to be a good idea.

**The executive branch does have some power with regard to how existing law is applied. That is, in cases in which a particular provision in the tax law is ambiguous, the Treasury Department has some leeway in choosing how to administer the law. And then if taxpayers oppose the way in which the Treasury Department applies the law, the judicial branch (i.e., the courts) will ultimately get involved as well.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

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