NY Times article: Taking a Closer Look at a Proposal to Limit Tax-Deferred Savings

[Huston55]

This is another article in the recent NYT series on retirement.

http://www.nytimes.com/2013/05/15/b...rs-opposition.html?ref=retirementspecial&_r=0

I'm not normally troubled by this kind of news but, this article troubles me greatly. It seems to be a (another?) signal that it might become more and more difficult to become FI and to FIRE. Here are some excerpts:

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IN his 2014 budget, President Obama proposed limiting how much money a person could put into a retirement account on a tax-deferred basis. The limit would be the amount needed to buy an annuity that pays a retiree the maximum allowed under a defined benefit plan. That is now $205,000 a year, which would translate to a balance limit of $3.4 million for someone who is 62, according to the administration. The formula would factor in not just defined-contribution plans, like 401(k) and individual retirement accounts, but also defined-benefit plans, or pensions.

But the number potentially affected grew considerably when the institute looked at the fine print of the White House budget proposal, popularly known as the Green Book. There the Treasury Department said the amount needed to buy that annuity worth $205,000 a year at 62 would be calculated at the end of each year and apply to everyone’s contributions for the next year, regardless of age.

At current rates of 4 percent, which are historically low, a 31-year-old with $1 million in his retirement accounts would bump against the cap to buy that annuity. However, if the assumed rates (used to calculate the future value of an account today) were 6 percent, then a 33-year-old with $500,000 in her retirement accounts would hit the cap, meaning no more tax-deferred savings that year. In an extreme case, a rate of 8 percent would mean a 25-year-old with $131,806 in a retirement account would hit the cap, though not many 25-year-olds have that kind of nest egg.
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I'd like to read others' views. Mine is that this motivates the wrong behavior and, based on how little revenue it would actually raise, seems to be punitive.

 

[dunkelblau]

Yeah I can see how if you want out long before 62, you won't get as much tailwind. But I guess I don't see why people should expect tax breaks for doing what they should be doing anyway. In my case it wasn't the tax break that motivated me to sign up for a 401K, it was the employer match. And even if neither existed I don't think my savings rate net of taxes would have changed very much.

 

[anethum]

I'm not troubled at all by the proposal. I agree with this from the article:

Jared Bernstein, former economic adviser to Vice President Joseph R. Biden Jr., made the argument on his blog that without the tax deferral the wealthiest Americans would still save, so giving them a tax break was a wasted expenditure. But most Americans should be worried about not having enough money to retire comfortably, not a limit on the tax deductibility of their contributions.

 

[nun]

If you have enough money to worry about it, then you don't need to worry about it. You can always save after tax if you run up against tax deferral limits, and that's a better way to become FI befor retirement age anyway.

Mr. Creosote - YouTube

 

[clifp]

Yeah I can see how if you want out long before 62, you won't get as much tailwind. But I guess I don't see why people should expect tax breaks for doing what they should be doing anyway. In my case it wasn't the tax break that motivated me to sign up for a 401K, it was the employer match. And even if neither existed I don't think my savings rate net of taxes would have changed very much.

The employer match is exactly the thing that is being threatened by this idea. If you accumulate too much in your 401K, not only can't you contribute money but you can't collect your employers match either, since that counts as a contribution to your deferred.

If something changes, bear market, drop in interest rates perhaps in the future you can contribute but your employer match is lost forever.

This makes most prudent course to only save as much in your 401K as needed to get your employee match. But for many people the 401K deduction is essentially the only saving they do. I fear the impact of this proposal won't be raising more taxes, but rather discouraging middle to upper middle class from savings.

 

[bUU]

New things I learned from the article:

- The limit isn't a new number; it's a limit that has existed on DB plans, i.e., that which 401ks effectively replaced.

- The older you are, the more you are able to save tax-deferred, to make up for savings you couldn't make earlier.

A lot of the rest of the article was rehashing of tired old rationalizations for protecting really rich people from current taxation.

 

[NanoSour]

$205,000...really?

 

[pb4uski]

I rest easy. The House will never go for it in its current form so there is no sense in fretting over it.

 

[MichaelB]

Many more thoughts on the proposal can be found in this thread http://www.early-retirement.org/forums/f52/the-impact-of-a-retirement-savings-account-cap-66151.html

 

[Sesq]

I trust the many k street lobbyists who will be paid handsomely to ensure this never happens. The bad guys on this issue won't be willing to push anywhere near as hard since the revenue estimate is low.

 

[Independent]

I was going to make a comment, but multiple posters beat me to it:

But I guess I don't see why people should expect tax breaks for doing what they should be doing anyway.

without the tax deferral the wealthiest Americans would still save, so giving them a tax break was a wasted expenditure.

If you have enough money to worry about it, then you don't need to worry about it. You can always save after tax if you run up against tax deferral limits,

 

[Big_Hitter]

I heard that part of the budget proposal was DOA.

 

[ESRwannabe]

I've been saving roughly half in my retirement accounts and half in my taxable brokerage account from the beginning. So I am not worried about the government making changes.

When I ESR in a couple of more years (age 45 or so) I'll only be using my taxable account. The retirement accounts will be left alone so that they can grow enough over time for me to fully retire in my 60s.

 

[scrabbler1]

When I ESR in a couple of more years (age 45 or so) I'll only be using my taxable account. The retirement accounts will be left alone so that they can grow enough over time for me to fully retire in my 60s.

This has been my basic plan, too, since I ERed at age 45 back in 2008. At the time, I had about 2/3 in retirement accounts and 1/3 in taxable accounts. But I was able to cash out my company stock which was half of my retirement account (1/3 of my overall portfolio) and put it into my taxable account, thereby reversing my ratio to 1/3 retirement and 2/3 taxable. The IRA, along with SS and my frozen company pension, are my "reinforcements" and await my turning ~60 in 10 years. The main challenge is to get to age ~60 intact.

 

[gerntz]

If this is going to happen, the same limit needs to be put on employer funded pensions.

 

[meierlde]

If this is going to happen, the same limit needs to be put on employer funded pensions.

As noted the proposal grew out of the limits on ERISA pensions. Recall running estimates of pension before I left that showed had I stayed to 65 I would have hit the limit of a ERISA pension, using upper limits of raise estimates. Many corps have suppemental pensions that are not insured above those limits however, how would they count? Read almost any proxy and you see the suppemental pension mentioned in the compensation portion.

 

[Independent]

As noted the proposal grew out of the limits on ERISA pensions. Recall running estimates of pension before I left that showed had I stayed to 65 I would have hit the limit of a ERISA pension, using upper limits of raise estimates. Many corps have suppemental pensions that are not insured above those limits however, how would they count? Read almost any proxy and you see the suppemental pension mentioned in the compensation portion.

Yes, this proposal is intended to convert the limits that already apply to tax qualified DB pensions into limits on DC balances. In fact, it combines them and compares the total to the existing DB limit.

The supplemental pensions don't have the same tax status as the pensions that ordinary workers may get, so that aren't affected by this proposal.

 

[bUU]

And so post-tax contributions to IRAs and 401ks would be analogous to supplemental pensions.

It makes sense.

 

[Texas Proud]

And so post-tax contributions to IRAs and 401ks would be analogous to supplemental pensions.

It makes sense.

I would assume by the intended proposal that you could not make any new contributions.... pre or post tax to IRA or 401(k)..... or any plan for that matter.....