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Old 02-08-2015, 09:56 PM   #101
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"For a taxpayer who is under age 62, the accumulated account balance would be converted to an annuity payable at 62, in the form of a 100-percent joint and survivor benefit using the actuarial assumptions that apply to converting between annuities and lump sums under defined benefit plans."

that's exactly how EBRI and I calculated it, per the rules in IRS Section 417(e), which have been around a while - there is no panic button being pushed, I'm just trying to substitute facts for appearances
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Old 02-08-2015, 10:06 PM   #102
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But what it fails to address is that the limit will increase from the taxpayer's current age to age 62 and that is an easy fix to make. Also, if it is desirable to keep it simple, just fix the age 62 annuity factor.

Actually what I suggested in an earlier post is the same as the (415db limit) * (age 62 annuity factor)/(1+i)^(62-x) formula you posted with only 2 differences - 1) the annuity factor is fixed at the current factor and 2) the discount factor is based on 1 + i - inflation rather than 1+ i. Since inflation is the base for interest rates, it shouldn't be too hard to define inflation given i.

I suspect that such issues would be sorted out if the proposal were to proceed (which I think we both agree is unlikely) so let's just agree to disagree for now.
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Old 02-08-2015, 10:06 PM   #103
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But even if you are right, it only means that people might be restricted from contributions and later allowed to make contributions as n, the annuity factor, i and the limit change.
I'm right and your second part of that sentence is correct.
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Old 02-08-2015, 10:11 PM   #104
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But what it fails to address is that the limit will increase from the taxpayer's current age to age 62 and that is an easy fix to make. Also, if it is desirable to keep it simple, just fix the age 62 annuity factor.
"A taxpayer who has accumulated amounts within the tax-favored retirement system (i.e., IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained by governmental entities) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit of $210,000) payable in the form of a joint and 100-percent survivor benefit commencing at age 62 and continuing each year for the life of the participant and, if longer, the life of a spouse, assumed to be of the same age would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements. Currently, the maximum permitted accumulation for an individual age 62 is approximately $3.4 million."

Note the use of the words "under current law"; that means the limit isn't adjusted for potential future COLAs. How can it be, they haven't been issued yet?
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Old 02-08-2015, 10:14 PM   #105
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I suspect that such issues would be sorted out if the proposal were to proceed (which I think we both agree is unlikely)
I agree it's unlikely but...who knows
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Old 02-08-2015, 10:43 PM   #106
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I hate to be pedantic Harley but a non-spouse inherited ROTH (child, grandchild etc) has to be withdrawn over the next 5 years, so not much scope for growth.
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That is not true, hence Ed Slott's Stretch IRA concept.
GrayHare is right, according to the link you (Alan) gave me.
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The beneficiary will have to take out the entire balance by December 31st of the year containing the fifth anniversary of the owner's death or the beneficiary will have to start taking distributions over the beneficiary's life expectancy starting no later the December 31st of the year following the year of the owner's death.
and a little further down,
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A beneficiary would be well-advised to try take advantage of the ability to take withdrawals from the inherited Roth IRA over their life expectancy. The funds in the Roth IRA will continue to grow and compound tax-free while still part of the Roth IRA and the distributions from the Roth IRA will be tax-free as well. Imagine having an account that grows tax-free during your lifetime and pays you tax-free amounts on a yearly basis! That is what a Roth IRA can be to your heirs, such as your children and grandchildren. This after-death tax-free growth is sometimes referred to as the stretchout IRA concept. It is generally considered to be one of the two most valuable aspects of a Roth (the other being the post-70˝ tax-free compounding).
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Old 02-08-2015, 10:46 PM   #107
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"A taxpayer who has accumulated amounts within the tax-favored retirement system (i.e., IRAs, section 401(a) plans, section 403(b) plans, and funded section 457(b) arrangements maintained by governmental entities) in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law (currently an annual benefit of $210,000) payable in the form of a joint and 100-percent survivor benefit commencing at age 62 and continuing each year for the life of the participant and, if longer, the life of a spouse, assumed to be of the same age would be prohibited from making additional contributions or receiving additional accruals under any of those arrangements. Currently, the maximum permitted accumulation for an individual age 62 is approximately $3.4 million."

Note the use of the words "under current law"; that means the limit isn't adjusted for potential future COLAs. How can it be, they haven't been issued yet?
Does not the current law provide that the limit will increase with inflation?

The proposal suggests that is does where it says "In either case, the maximum permitted accumulation would continue to be adjusted for cost of living increases."

As I understand it the current application of the formula you refer to is to calculate lump sum distributions today using today's limit If so, then the fact that the limit will increase in the future is not relevant to the calculation so there is no need to consider inflation in the limit.

I'm suggesting that the proposal is a different application and that since under this application one is calculating an amount today using tomorrow's limit (when the taxpayer is age 62) then the discount rate needs to be reduced for the growth of the limit and since inflation is the beginning point of interest rates, that is should be quite easy to do and would still be under current law since current law requires that the limit increase for inflation.

If this did go forward, I'm just saying that this has the potential to affect enough people that the calculation that you suggest is proposed is so obviously conceptually flawed that it would kill the whole thing, and while I'm not a big fan of the current administration, even I don't think they are that foolish.
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Old 02-08-2015, 10:51 PM   #108
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GrayHare is right, according to the link you (Alan) gave me. and a little further down,
mea culpa, I stand corrected
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Old 02-08-2015, 10:56 PM   #109
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You're pushing the panic button before the detailed calculations are even presented.
Don't forget, you're dealing with a group of people (Congress) that say things like "we have to pass this so we can find out what's in it". The time to press the panic button is before it becomes law.
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Old 02-08-2015, 11:46 PM   #110
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Don't forget, you're dealing with a group of people (Congress) that say things like "we have to pass this so we can find out what's in it". The time to press the panic button is before it becomes law.
And don't forget how the legal/paperwork nightmare has erupted over foreign accounts. Pretty much any American is shunned by any foreign institution due to the insane legal exposure due to the new IRS requirements for annual filings, and potential exposure to fines of something like 50% of the account values, for not following every single paper filing and rule.

All of this over, what, maybe 20,000 Americans who might have a few million in overseas assets?

When people floated the idea of the IRS requirements, do you think people said "Oh, it's just a few millionaires who have anything to worry about these IRS rules! Why would this poor truck driver working over in Saudia Arabia on a 6 month contract job or this teacher teaching English in a school earning $40,000/year have to worry about anything? She/He doesn't have millions to worry about!"

Imagine what every HR/account department will have to do in order to keep track and verify each employee doesn't go over the cap. Sure, the law won't directly impact many people....but legally (and indirectly), they would need a form from every employee. Possibly even records on every employee to ensure that they are covered. Or (more likely) some companies will simply stop making employer contributions to be 100% sure they don't mess up on a handful of employees. But even then, they would likely still need to ensure that they don't let employees make voluntary elective deferrals if their total balances exceed the cap for liability purposes. Which would still require account balances kept and maintained for every employee.

Need we think farther back than Anthem's announcement last week of data breaches to keep in mind how such large databases of sensitive data might be (mis)handled? If a company can't keep your SSN and name encrypted, imagine how many will handle something like your total 401k/403b account balances.
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Old 02-09-2015, 12:21 AM   #111
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You folks worry too much. Wake me if this ever appears in a bill that makes it out of committee.


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Old 02-09-2015, 03:33 AM   #112
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mea culpa, I stand corrected
For the moment.

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Don't forget, you're dealing with a group of people (Congress) that say things like "we have to pass this so we can find out what's in it". The time to press the panic button is before it becomes law.
Press now.

I previously posted this link about the rest of the proposals impacting retirement accounts in the proposed 2016 Budget:

President Obama’s 2016 budget targets retirement accounts - MarketWatch

Item #8 explicitly targets this.

This brings to mind something that Willie Sutton had to say about banks.
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Old 02-09-2015, 06:14 AM   #113
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Even if the tax deferral rate going in is the same as the tax payment rate coming out, it's still better to defer. The difference is that the person who defers doesn't have to pay capital gains taxes (or taxes on annual dividends) on the earnings. The person who defers eventually pays income taxes on the original investment plus the investment returns. The person who does not defer initially pays income taxes on the original investment and eventually pays capital gains taxes on the investment returns. But here is the tricky part. Because the investment is initially taxed at the income tax rate, the person who does not defer is effectively paying regular income taxes on the investment returns too. In essence, the investment returns are pre-taxed at the income tax rate.

Consider the following example. For simplicity, assume a 50% income tax rate, a 25% capital gains tax rate, a 10% return rate (no dividends), and a 30 year investment period. Assume Bill Gates and Mitt Romney both have $10K available to invest. Bill puts his money in a 401K. Mitt puts his money in an after-tax account.

After 30 years, Bill's $10K grows to about $174K inside his retirement account ($10K x 1.1^30). He withdraws the money from his account and pays 50% in taxes. He now has $87K to spend.

Mitt can invest only $5K because his $10K is initially taxed at 50%. After 30 years, Mitt's $5K grows to about $87K - the same as Bill's. Mitt withdraws the money from his taxable account and pays 25% in capital gains taxes on the earnings. He now has only $67K to spend. This is about 25% less than Bill.

In this example, the benefit of deferral is basically equal to the capital gains tax rate. So deferral is very advantageous even when the before and after tax rates are the same.

Admittedly, Bill and Mitt probably don't care because the amount they can contribute to a 401K is trivial compared to their overall portfolio's. But it matters to me. Even though I'm not Bill Gates or Mitt Romney, I have a sizable DB pension waiting for me and my marginal tax rate in retirement will be (almost) the same as the rate while working. Deferral is good.

The math makes sense above assuming a 10 percent long term return. It is still advantageous at a 5 percent return but much less so.

What most miss in the discussion is that there is real risk that the rules of the tax deferral account can change for the worse over the course of 30 years of government eyeing those accounts and getting greedy- just look what the Obaminator proposed recently on 529 accounts as a simple example.


Even to think that the tax rates will remain at the same rate as today vs the future is also short sighted. In the 1950s marginal tax rates were as high as 90 percent in America. What's to say rates can't go up. Look at all the social benefits put into place - ACA subsidies and on and on. Someone has to pay for those. Taxes surely will go up as they have for cap gains. Medicare. And so forth.

I'm not convinced deferred taxes are all that people tout them to be. One may get to the tax deferred tunnel and wind up paying way more in taxes at withdrawal time versus today.

It is a Very simplistic assumption that can lead one down a path of security in their decision to save in tax deferred vehicles that may not not exist as long as governments can change tax rates.

Much better to follow portfolio theory and stay diversified in taxable and tax deferred accounts. There is not a best way as far as I can tell given variables.
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Old 02-09-2015, 08:16 AM   #114
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As I understand it the current application of the formula you refer to is to calculate lump sum distributions today using today's limit If so, then the fact that the limit will increase in the future is not relevant to the calculation so there is no need to consider inflation in the limit.

I'm suggesting that the proposal is a different application and that since under this application one is calculating an amount today using tomorrow's limit (when the taxpayer is age 62) then the discount rate needs to be reduced for the growth of the limit and since inflation is the beginning point of interest rates, that is should be quite easy to do and would still be under current law since current law requires that the limit increase for inflation.
First paragraph is correct. Second paragraph would require a re-write of current law/regs.
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Old 02-09-2015, 08:17 AM   #115
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You folks worry too much. Wake me if this ever appears in a bill that makes it out of committee.


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Old 02-09-2015, 08:43 AM   #116
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I'll keep you posted
Especially if it makes it out of committee with a discount rate of i rather than i less inflation, because that is just plain wrong economically IMO.
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Old 02-09-2015, 08:57 AM   #117
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Not to mention the HR nightmares:

1. What happens to those who 'break the rule' and then contribute to a tax-deferred account, either an employer or employee contribution.
a) Is it the employer's fault? The employee's? Is there a penalty? Who pays?
b) Is there a gov't list that has everyone's SSN and their total retirement plan assets as of 12/31 of the prior year that is distributed to all HR departments in every company? Or is it the employee's responsibility to tell the employer "you can't contribute to my 401k with the employer portion because my balance is too high"?
c) If the employee doesn't tell the employer, are the both fined? Just the employee?


2.
a) And if there is a company that has a pension plan, do you then re-write the entire pension equation if someone has both tax-deferred dollars in a 401k/IRA in a former employer's plan, as well as a pension they qualify for, and their total accumulated plan benefits exceed the 'cap'? It's no longer "years of service times x% per year", but some really whacky equation, because your total tax-deferred assets exceed the cap.

b) And then when interest rates change, the cap changes. Necessitating a new equation.

c) And when your portfolio fluctuates and your total plan assets is below the cap, it then necessitates another equation.

Oh, and interest rates changed again. Time to re-calculate everything. Oh, 3 executives just tried contributing to the 401k this pay period and are over the cap.

From what I have gathered, it can be difficult enough for accounting and HR departments to keep track and do elective deferrals correctly as it currently stands. Imagine having to also keep logs and track EVERY employee's 401k balances from an annual gov't report? Not to mention a big trust issue with companies having to have access to a list of every employee and their total retirement plan balances that they own, both inside and outside the company.

And what about HSAs and 529 plans? Do they count towards retirement assets? The HSA moreso than the 529 plan (since there's no penalty to withdraw from an HSA after 65) - but shouldn't both of them, in theory, be counted as tax-deferred plans, and be counted towards the tax-deferred plan cap? If not, I suppose there might be a sudden surge in "retiree education", especially distance learning at a semester over in Europe, or a "semester at sea" on a cruise ship.
1) You raise a number of technical questions. I think they all came up 40 years ago with the first IRA law, and we already have answers.

The contribution limit on IRAs applies to the sum of all IRAs that one individual may own. We know that complying with the contribution limit has been the individual's responsibility, not the IRA provider's responsibility. This asset limit would presumably work the same way. So

a) It's the employee's responsibility. If there is a penalty for non-compliance, it's the employee's penalty. (Just like IRA contribution limits.)
b) No. There is no gov't list of IRA contributions by SSN that IRA providers are supposed to access. Similarly, there is no need for such a list for retirement account balances.
c) I'm not sure about "fine", the penalty appears to be that you get a bad tax treatment. But, that penalty is entirely the individual's responsibility.
Note that this proposal explicitly says "use the same rules as current law" for IRA excess contributions. See page 169 here: http://www.treasury.gov/resource-cen...ons-FY2016.pdf

2) Again, we've had caps on defined benefit pension plans for a long time. Some of your questions have already been answered.
a) No. Companies do not write new formulas for pension benefit accruals when they have people hit the current $210,000 cap. It's just a cap, the basic formula doesn't change. No reason to change it here.
b) No. The current cap changes periodically (it's indexed). There was no reason to change the formula in the first place, so there is no reason to change it when the cap changes.
c) Again, no, for the same reason.

There is only one new requirement for DB plans. The existing cap applies to all employees. With this proposal, the cap would be unique to each employee who happens to hit it. As in "Due to other savings, you need to freeze my DB plan benefits at the $94,000 I had accrued at the end of 2014. If my situation changes in the future, I'll tell you." So the programmer who builds the big employee files that support modern DB pension plans has to add one more field, and some HR person has to fill it on the rare occasions that somebody hits this limit.

The proposal does not include either HSAs or 529 plans. It doesn't increase the opportunities for "abuse" (if that's what bothers you) for those plans.
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Old 02-09-2015, 09:39 AM   #118
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it all started back in the day so your employer would have a tax-efficient means to provide you a pension - it's the backbone of the qualified pension concept

same concept has applied to the individual since the mid 80s

taking away that ability is a penalty
Yes, we've had tax preferred DB and DC plans for a long time.
For both of them, "back in the day" Congress decided that the tax preferences were intended to help middle class people retire with "reasonable" financial security, not to help CEOs retire with "extravagant" benefit packages.
So Congress has always drawn lines in that wide gray area where "reasonable" transitions to "extravagant".
This proposal strikes me as a technical correction to those lines.
One issue is that some people have both DC and DB, and it seems that they should coordinate somehow. Earlier attempts haven't been that good.
Another is that some DC accounts have accumulated assets far about what Congress ever envisioned, and this is a bandaid to stop that from getting even "worse".

I can discuss whether this is the best technical way to achieve the goal of limiting the tax preferences to "reasonable" benefits.
But, I recognize that no matter where/how they draw the line, some of people who fall just above it will complain that they aren't getting all the tax benefits they "deserve". I guess the fact that they will complain doesn't convince me there shouldn't be any lines. Or, that adjusting the line downward is necessarily a "bad thing". It depends.
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Old 02-09-2015, 09:48 AM   #119
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I can discuss whether this is the best technical way to achieve the goal of limiting the tax preferences to "reasonable" benefits.
we already have them - 415b, 415c, 402g - we don't need to be looking at balances, that's just silly - who gives a crap whether someone took a big risk and it paid off?
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Old 02-09-2015, 10:23 AM   #120
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+1

As society, the US doesn't save enough, and individually we don't save enough for retirement.

Uncle Sam wanted to encourage both of these activities, so they invented, and have continuously improved tax deferred saving accounts. For us Ants, who did what were told we should do and maxed out our 401K, IRAs etc, to then come back when we are in the retirement Redzone 50+ and 5 years or less from retirement and being told you saved too much, you did too well. No more tax deferred savings, no more employer matches, or pension accumulations, solely for the crime of saving too much, while allowing the grasshoppers to take advantage of these saving breaks and employer contributions, sets a horrible precedent.

This proposal has zero chance of being adopted (thank god), so I don't think it is really worth debating anymore.
Your first sentence makes two very broad claims. I'm not sure exactly what you mean by them. I'm not sure if that's relevant here.

I am sure that somewhere in the US there is a person who was born the same year I was, who earned about what I did, but didn't save like I did.
Now I'm retired with enough assets for a comfortable life. He may still be working, and when he retires, he will have to make do on much less than I have.

We made different choices. Your post seems to have a moral tone, as if that "grasshopper" did something wrong, and as if I need to be rewarded by the gov't for making the "right" choice. I don't see it that way. It's just different priorities.

I understand that you may be concerned that somehow that other person will be so destitute in his old age that I will have to pay taxes to support his SNAP benefits or his low income housing subsidy. I'm not worried. Given his income, his SS benefit will easily cover the necessities of life. He's not going to get a SNAP benefit or a low income subsidy.

I see this proposal as a technical issue of how far to extend special tax treatment to fortunate people like me. I don't see it as a morality play between the ants and the grasshoppers.
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