Obama Targets “Wealthy” IRA Accounts

President Obama’s budget is set to come out this week and will propose a limit on how big you can grow your retirement account. While the article on the The Hill talks about Mitt Romney’s rather large IRA, in reality the size they are talking about is much much smaller.

We’re not talking about Obama targeting $100 million dollar retirement accounts. What’s discussed in the proposal is anything over $3 million for all of your retirement accounts. So what’s proposed isn’t just targeting IRA accounts, but 401(k) accounts are included as well.

Once you reach the limit, no other deposits will be tax deferred. In effect you are capped on the size of your retirement account. Though I assume they are also talking about any capital appreciation as well, and not just deposits. Most of Romney’s account grew from capital gains, and not by savings.

What’s not clear is what happens if you are over $3 million? Do they take 100% of anything over $3 million? When would your retirement account total be determined? Oddly enough public pensions aren’t mentioned in this proposal. One could have a possible argument of capping retirement accounts at say $50 or $100 million, but why $3 million? My other question is would this be like AMT and have to be manually adjusted every year? Will it be adjusted for CPI at all? There are too many open ended questions regarding this proposal, and I suspect it wasn’t fully thought out.

While reading this article I was thinking – “This administration can’t be this stupid can they?” From my libertarian viewpoint we should do away with all deductions and go with a flat tax. I realize this will never happen, and our tax code will continue to help one group while punishing others – retirement accounts included.

Uncle Sam ObamaI’m not sure I understand the logic behind this proposal. To me, this only appears to be a money grab as a means to distribute wealth – to punish savers and help individuals who haven’t. The article goes on to state this cap would generate only $9 billion over a decade. This is a minuscule amount in the deficit and would cover only a few days of the government. On the flip side, this would cause many other unintended consequences and hurt capital formation. Do we really need to decrease investing with the “robust” economic growth we are seeing?

With tax deferred retirement accounts, it’s not exactly a free lunch either. While you save a decent amount in taxes now, you get hit on the way out (except for Roth IRA and Roth 401(k)s). When withdrawing from retirement accounts, it is taxed as ordinary income. Unlike with taxable accounts, you can be taxed at a much lower rate. So depending upon future tax rates and the amount you need to withdraw in year, it can be a significant amount. As I highlighted previously, it can be upwards of 50 cents of every dollar you take out.

With three million in retirement accounts, you aren’t exactly living large, either. If you consider a 3% withdrawal rate, it’s only $90,000 annually. By today’s standards – that’s not rich and only upper middle class. This is before taxes are even taken out.

Some senior administration official (unfortunately, they don’t mention who), stated taxpayers currently “accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.” Excuse me, but more than needed?? Who determines what’s more than reasonable? Ehem, that sounds vaguely familiar; perhaps you’ve heard of this quote:

“From each according to his ability, to each according to his need” – Karl Marx

Ironically, anyone who saves a decent amount for retirement is trying to be self-sufficient. They are trying not to rely on government assistance. Obviously this would be a disincentive for individuals to save once past a specific amount.

If this proposal does go though, it sets a dangerous precedent. It would change the rules for retirement mid-game for many. My question would be: why stop at $3 million?

As I’ve mentioned previously, I recommend not only good asset allocation with your investments, but also a mixture between retirement and taxable accounts. You never can predict what stupid move the government might do next. If we continue on the path of never ending deficits, retirement accounts will certainly be a target. This further reinforces my view the government is a viable risk and must be taken into account when investing.

Comments

  1. Special_Ed says

    ” My question would be, why stop at $3 million?”

    Trust me…they won’t.

    The goal is for government to take everything and replace your retirement, savings, and investments with whatever they see fit. It’s because some people have too much.
    This will, of course, have no affect on our rulers, but the riff raff can’t be trusted to spend and save in a way that is government approved. This only makes sense, seeing how the government has done such a bang-up job managing the money they have already taken from us.

  2. says

    If I was Mitt Romney, I’d rather my money was outside of a retirement account – he (or an heir) will pay 43.4% in current Federal taxes, versus the low 20%s of dividends/capital gains. This Mitt Romney Rule is a weird dodge.

    And, yeah, what about pensions? If we value a cashflow at 25 or 30x, you’re looking at pensions of $120,000 or $100,000 a year. That would fit quite a few folks in my home state of CA…

  3. says

    I guess what I really don’t understand is the whole rational here. As you said these accounts are taxed as ordinary income on the way out and the law requires that you start distributions at 70 1/2. So really who cares how large these accounts are, there is a formula for the percentage of the account that is subject to withdrawal (and taxes) each year starting at age 70 1/2. I believe the first year distribution takes the account balance and divides it by approx 26 and then 25 in year 2 and so on. So a $5 million IRA would have a required distribution of about $192,000 in year 1, all of which is taxable. This is truly a moronic proposal.

    • says

      You would think the government would WANT large accounts because of RMD. In addition to of all of the other requirements associated with IRAs when you die.

  4. says

    It is so sickening that something like this would even be proposed. It is ridiculous and short sighted.

    What are some of the unintended consequences?
    - Maybe money flows into Munibonds causing a (bigger) bubble?
    - Maybe money leaves the country or we have more ex-pats?
    - Maybe more business owners start using DB plans instead where you can shelter HUNDREDS OF THOUSANDS of dollars per year

    Why not just up the RMD Date? Why do this move and then at the same time (well 2 months ago) increase the estate exclusion amount to $5.250mil? Seems counter productive. That $9bil could have easily been taken care of by having a 3.5mil exclusion ratio

    • says

      Evan, there’s been discussions of phasing out muni bonds tax exclusions after high levels of income. If that was ever done that certainly would help the local municipalities and state shortfalls (scarc).

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