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Old 04-05-2013, 03:08 PM   #41
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So, is this a limit on how much people can save, is this a limit on how much income people can defer?
If the second link in post #1 is correct it seems only on how much people can defer.
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The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts. Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The budget would limit an individualís total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million in 2013.
I (naively) thought fromt the start that tax deferred accounts were specifically developed to encourage/make it easier for middle and lower income groups to accumulate retirement nest eggs. There's no need for deferrals to have an unlimited upside IMO, accumulation above $3M has to be done in taxable accounts. Unless I'm misinterpreting (entirely possible), again, doesn't seem unreasonable or contrary to the original purpose of tax deferred accounts IMO.
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Old 04-05-2013, 03:08 PM   #42
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If a $3m cap applies to 401ks as well, then employers would need to be told "Don't contribute further to my account" which could lead to gravevine whispers as to which employees have more than $3m saved up.
Where I work, the only people who have access to information about how much each person is contributing are the same people who stuff the quarterly 401k statements in the envelopes and stick them into the mailboxes in the mailroom. It should, of course, be -- no -- remain the employee's responsibility to change their contribution amount when they're over the limit, just like it works today if an employee contributes to two 401k's in the same year. And that change in contribution amount should remain as confidential as any salary-related matter.
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Old 04-05-2013, 03:13 PM   #43
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If a $3m cap applies to 401ks as well, then employers would need to be told "Don't contribute further to my account"
Not necessarily. The employee wouldn't turn away an employer match just because it will be subject to taxation. The 401K account itself wouldn't be impacted at all--just any amounts above $3m will be taxed. And if the market slumps and the 401K decreased below $3m, then it would all again be tax free.

Implementation would be tricky--right now brokers don't track cost basis for IRAs, so it would be a paperwork hassle. Big time.

That hole in the backyard stuffed with Kruggerands and Maple Leafs is starting to look more appealing.
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Old 04-05-2013, 03:39 PM   #44
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We LIKE multiplying times the poverty level when it applies to Obamacare subsidies
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Old 04-05-2013, 04:12 PM   #45
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The theory that they are not allowing any more contributions over 3 million is not how I am taking it. Since they are expecting to generate 9 billion in tax revenue I think it would make all balances over 3 million subject to immediate taxation, since they are limiting the total balance in tax deferred balances not contributions so that once an account got to 3 million and if the stock market went up 20% you have 600 thousand dollars of taxable income to take in from your deferred tax account, that is how I am reading it.

There is a government exemption for 401K over the normal 401k limit for highly paid executives where individuals can defer income and be matched just like 401K but the money is usually in a seperate Rabbi Trust arrangement where if the company you are working for goes bankrupt your contributions become part of the general creditor claims. This is how people like Mitt Romney end up with huge accounts.
Of course the basic idea is once they get the 3 million level in, dropping to get more income from "rich" people becomes quite more popular with the general population. I could easily see where people in time of tax need would say balances over a million should pay up their taxes.
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Old 04-05-2013, 04:23 PM   #46
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Also since the key seems to be the amount needed to fund an annuity of $205,000 if interest rates rise the amount of deferable money could really plummet, making timing of taxes on deferred accounts less definitive
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Old 04-05-2013, 04:29 PM   #47
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The theory that they are not allowing any more contributions over 3 million is not how I am taking it. Since they are expecting to generate 9 billion in tax revenue I think it would make all balances over 3 million subject to immediate taxation, since they are limiting the total balance in tax deferred balances not contributions so that once an account got to 3 million and if the stock market went up 20% you have 600 thousand dollars of taxable income to take in from your deferred tax account, that is how I am reading it.

There is a government exemption for 401K over the normal 401k limit for highly paid executives where individuals can defer income and be matched just like 401K but the money is usually in a seperate Rabbi Trust arrangement where if the company you are working for goes bankrupt your contributions become part of the general creditor claims. This is how people like Mitt Romney end up with huge accounts.
Of course the basic idea is once they get the 3 million level in, dropping to get more income from "rich" people becomes quite more popular with the general population. I could easily see where people in time of tax need would say balances over a million should pay up their taxes.
What get's taxed then and at what rate? $600k at your marginal tax rate? If I have multiple accounts, do I get to juggle where I am taxed? And then a penalty for using that money to pay the IRS? Do I get a credit if market losses take me back under the $3MM mark? What about being "double taxed" on Roth's?

I've always understood taxation on income. This is the first proposal to hit wealth.

I've got my magic number between $3 and $4MM. Of course, I want to pull the plug early and my WR is conservative, and that is in today's dollars. I can see this being a burden in the future for young people like me who saved, but have no plan to live on a $205k/yr lifestyle, or even half of that.

My gut is this won't pass, and I hope for once my gut is correct.
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Old 04-05-2013, 04:46 PM   #48
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The AMT was intended to hit 155 families when it was implemented. All I can say is...

Unintended Consequences
Absolutely. Imposing an arbitrary upper limit on total retirement savings accounts would DIScourage serious investing by imposing a functional success tax. Why take more "risk" if it only exposes you to gov't acct limits The $$ streaming out of US (world) stock markets could make the crash of '08 (or even 1929) look like the Good Old Days.

A fixed $3M overall retirement acct limit is not as generous as it first seems. Today's 23yr old with ave retirement acct deposits (self + employer match) of $10k/yr getting historically ave long-term stock market returns of 8% (less than since 1928,including the Crash) retires at 65 with >$3M balance.

And BTW- If you think these clowns in DC will honestly inflation-adjust that $3M, I've got some top $$ swamp land to sell ya Remember that the home mortgage deduction limit seemed huge back in 1986 when it was set at $1M. But it was NOT indexed. That $1M mortgage was over 12X the ave US home price back then, but now is only ~3X the ave US home price & only 25% above even the FHA loan limit in some high-cost areas (e.g. parts of CA).
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Old 04-05-2013, 05:01 PM   #49
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Absolutely. Imposing an arbitrary upper limit on total retirement savings accounts would DIScourage serious investing by imposing a functional success tax. Why take more "risk" if it only exposes you to gov't acct limits The $$ streaming out of US (world) stock markets could make the crash of '08 (or even 1929) look like the Good Old Days.
I don't agree. I mean right now there is an annual cap on how much you can contribute to tax deferred accounts and I haven't noticed it keeping anyone from saving outside the tax deferred accounts. People who want to and are able to save more will do so whether there is an account value limitation in addition to the annual contribution limitation or not. While I might not have liked this personally I think a fairly strong argument can be made that the contribution limits now are too high and that tax deferral on retirement accounts in reality helps most the people who least need the help. I don't see that most low-income or average-income people get all that much benefit from IRAs or 401(k)s. I'm not against IRAs or 401(k)s - they have been great for us but the tax deferral aspects are primarily of benefit to the people who have high marginal rates during their working years, which isn't the vast majority of people.
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Old 04-05-2013, 05:01 PM   #50
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I am absolutely livid about this. First Cyprus, now this crap. I can't take it any more. Why do they hate the productive middle class so much. Why do they hate people that are extremely frugal and decided to build something. $ 3 million is a lot but who in the hell am I to decide what is and isn't wealthy. And BTW, these numbers will probably end up not being indexed to inflation or to some garbage inflation index making this cap become 1 million in real dollars for those retiring in 20-30 years.

I don't care about the mechanics of this plan or anything else. The fact that it is even proposed to "save" less than a billion a year from the irresponsible congress clowns' deficit is pathetic. This is pure class warfare and needs to be stopped.
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Old 04-05-2013, 05:32 PM   #51
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As far as I can see, this merely stops the preferential tax treatment for those who exceed the $3 million, and then only for the amount above that limit. You can still save all you want on an after tax basis.

Is it really worth such angst? Suppose you have $3 million in an IRA that you rolled over from a 401k when you retired. Under current law, any withdrawal will be taxed. The only tax break is deferring taxes on the earnings, which you will presumably eventually withdraw and be taxed on. Now, you'll have to pay the taxes on a current basis.

I suppose those still in the accumulation stage might prefer to be able to continue contributions to a 401k, but sooner or later, you're going to have to pay taxes on those contributions. This just makes it sooner.

And, frankly, if you've amassed $3 million in your IRA, it's unlikely you need the continued tax breaks as a carrot to get you to save for retirement, which I believe was the original intention of the law setting up 401k's and IRAs.

So perhaps a deep breath is in order?
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Old 04-05-2013, 05:36 PM   #52
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As far as I can see, this merely stops the preferential tax treatment for those who exceed the $3 million, and then only for the amount above that limit. You can still save all you want on an after tax basis.

Is it really worth such angst? Suppose you have $3 million in an IRA that you rolled over from a 401k when you retired. Under current law, any withdrawal will be taxed. The only tax break is deferring taxes on the earnings, which you will presumably eventually withdraw and be taxed on. Now, you'll have to pay the taxes on a current basis.

I suppose those still in the accumulation stage might prefer to be able to continue contributions to a 401k, but sooner or later, you're going to have to pay taxes on those contributions. This just makes it sooner.

And, frankly, if you've amassed $3 million in your IRA, it's unlikely you need the continued tax breaks as a carrot to get you to save for retirement, which I believe was the original intention of the law setting up 401k's and IRAs.

So perhaps a deep breath is in order?

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First they came for the communists,
and I didn't speak out because I wasn't a communist.

Then they came for the socialists,
and I didn't speak out because I wasn't a socialist.

Then they came for the trade unionists,
and I didn't speak out because I wasn't a trade unionist.

Then they came for the Jews,
and I didn't speak out because I wasn't a Jew.

Then they came for the Catholics,
and I didn't speak out because I wasn't a Catholic.

Then they came for me,
and there was no one left to speak for me.
Remember, all of this is being done to "save" a billion dollars a year.
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Old 04-05-2013, 05:40 PM   #53
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Remember, all of this is being done to "save" a billion dollars a year.
I'm sure Pastor Niemoller was all about protecting your tax breaks. Overwrought exaggeration helps no one.
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Old 04-05-2013, 05:40 PM   #54
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That huge pot of untaxed 401K and IRA money is going to prove to be a very tempting target for Washington.

For those who say "It's no big deal, you were going to be taxed on it anyway," I'd say "If it's no big deal, why can't the government wait a few years and get the money according to the original plan?"

Because they want the money sooner. People have needs, and this money needs to be tapped.

Turns out there's a bunch of Roth money sitting out there waiting some clever treatment, too. Paid tax already? Not on the gains. Anyway, that was then, this is now.
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Old 04-05-2013, 05:44 PM   #55
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Maybe because the money is needed now. Perhaps if we cancelled the F-35 program we could get somewhere on deficit reduction. I would certainly prefer that.
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Old 04-05-2013, 05:47 PM   #56
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Maybe because the money is needed now. Perhaps if we cancelled the F-35 program we could get somewhere on deficit reduction. I would certainly prefer that.
You can bet these people think they need their money, too. And it is their money.
Regarding spending on this program or that--Down that path waits Porky, as we well know. But the issue of taxing wealth in retirement is dead-center a FIRE issue.
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Old 04-05-2013, 05:49 PM   #57
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Maybe because the money is needed now. Perhaps if we cancelled the F-35 program we could get somewhere on deficit reduction. I would certainly prefer that.
Yes Yes Yes. This is the direction that we need. F-35s and every single department of the federal government needs to be up for the chopping block. The absolute last thing that needs to be "cut" are tax codes that change the rules of the game after the fact. And that should only really be considered after the government has at least been cut in half.
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Old 04-05-2013, 05:49 PM   #58
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You can bet these people think they need their money, too.
Regarding spending on this program or that--Down that path waits Porky, as we well know. But the issue of taxing wealth in retirement is dead-center a FIRE issue.
Quite right on both counts. But, really, does it call for such handwringing?
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Old 04-05-2013, 05:51 PM   #59
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I don't agree. I mean right now there is an annual cap on how much you can contribute to tax deferred accounts and I haven't noticed it keeping anyone from saving outside the tax deferred accounts. .....I'm not against IRAs or 401(k)s - they have been great for us but the tax deferral aspects are primarily of benefit to the people who have high marginal rates during their working years, which isn't the vast majority of people.
From the Politico link, this proposal is mainly about the total worth of retirement accts, NOT just the amount contributed. Since this linkage to acct value has not happened in US tax code before, the actual effect on investing is open to some speculation. IMHO- this proposal would significantly affect investor behavior- much as current law affects which investments folks choose to hold in their tax-advantaged vs after-tax accounts (e.g. taxable bonds usu better held in retirement accts).
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Agree the max benefit from any tax-deferred savings plan go to those who contribute over many years with higher marginal rates while w#rking. But this assumes one's marginal tax rate will be significantly lower during retirement. Many now believe that marginal tax rates will INcrease in future years due to help cover national debt, which helps explain popularity of Roth IRA's.
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Old 04-05-2013, 05:52 PM   #60
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And it is their money.
Not exactly. It is their money with what could be considered an inchoate tax lien on it. When I look at my IRA/401k stash, I never forget that some of it belongs to the tax man.
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