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.
I’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.