How does budget proposal affect retirement accounts

[Gumby]

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?

 

[AndrewJackson]

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?

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.

 

[Gumby]

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.

 

[samclem]

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.

 

[Gumby]

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.

 

[samclem]

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.

 

[AndrewJackson]

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.

 

[Gumby]

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?

 

[ERhoosier]

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).
The only 7 investements you need: where to hold 'em - May. 12, 2008


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.

 

[Gumby]

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.

 

[AndrewJackson]

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.

You are giving the mafia way to much respect. Think about all the tax that was taken from your employer and yourself. Who is really morally owed that money?

 

[REWahoo]

I smell bacon...

 

[samclem]

But, really, does it call for such handwringing?

Surely one man's "handwringing" is another's "justifiable concern". And this is just a proposal. But it is fairly radical--a national tax on wealth (which is what this would be if it affects current account balances) is something we haven't done.
Smacking a bad idea down hard is one way to help keep it from returning right away.

 

[Gumby]

You are giving the mafia way to much respect. Think about all the tax that was taken from your employer and yourself. Who is really morally owed that money?

We live in a civilized society, not in a state of nature. By mutual consent, we tax ourselves to provide the benefits that we enjoy as members of that society. I enjoy many blessings by living in this country, including the most important one of having an economic system where I can earn a good salary. Accordingly, I believe that there is indeed a moral claim by society on some of my income. I don't like waste or spending on stupid things, but I'm happy to pay my taxes.

 

[clifp]

That hole in the backyard stuffed with Kruggerands and Maple Leafs is starting to look more appealing.

I have little doubt that if I had continued working I'd pushing the $3 million in a few years.

I currently have $1.4 million in my retirement accounts. This was accumulated from $1000-$2,000 ira contributions in 81-83 and then max out 401K contribution and most years and getting a generous company profit sharing contribution from 1984-2000. Over the last 10 year I've averaged just about 7.5% annual return a tad under the 8% of the S&P 500. I would have continued maxing out my 401K and with a company profit sharing in the 10K range contribution would have averaged $25,000 over 12 years that is another 300k, assume another 200K in investment gains and now my retirement account is $1.9 million at age 53. Now accumulating this amount of money assumes a salary in mid 100K range, well below the "rich" folks salary of 200K for singles.

1.9 million will reach $3 million by age 65 with a 3.8% return even adjusted for inflation a real 4% return isn't a particular hard barrier to achieve. Obviously at the point, if I was still working it would foolish for me to contribute anything to my 401K since it appears like it would be taxed twice. But it would really suck to have the company profit sharing contributions restricted.

I also have to question the administration assumptions on my retirement income. $3 million generates $210,000 in retirement income,really in what universe?

For instance using the Federal Government own TSP annuity calculator a 65 year old retiree with a 60 year old spouse, $3 million buys an annuity generate $7818/month, $93,800, with COLA light increase. A far cry from $210,000

Finally, part of the original idea behind IRA and 401K was not just to allow people to save for retirement but to encourage Americans to save period, this proposal discourages it.

 

[Gumby]

But it is fairly radical--a national tax on wealth (which is what this would be if it affects current account balances) is something we haven't done.

I guess I don't see how this is any different than RMDs at age 70, which is already the law and is in no way a wealth tax. RMDs are a way to tax some of the income that has heretofore been untaxed. This seems to be the same as moving up the RMD age for certain people.

 

[mickeyd]

I foresee a pretty interesting Congressional fight on this $3M IRA max subject. Sure $3M sounds like a ton of cash today but long term it really is not that much. I wonder how many Boomers who have $1.5M stashed in their IRA ever thought that they would have such a large amount? Is $1.5M really that large? No, it is not, especially if it is to last 30 years.

Occupy Wall Street (OWS) folks start getting your bed rolls and sleeping mats together...sounds like your summer fun will soon begin.

 

[M Paquette]

I guess I don't see how this is any different than RMDs at age 70, which is already the law and is in no way a wealth tax. RMDs are a way to tax some of the income that has heretofore been untaxed. This seems to be the same as moving up the RMD age for certain people.

Exactly. The change merely brings future tax revenue in several years for a very small slice of the IRA-holding populace, at the expense of another round of tax code complexity and reporting requirements. As a long term budget balancing contribution, this is all smoke and mirrors. (In other words, the change makes the 10 year projected tax revenues look better, at the expense of the 10-20 year revenues.)

 

[Gumby]

Exactly. The change merely brings future tax revenue in several years for a very small slice of the IRA-holding populace, at the expense of another round of tax code complexity and reporting requirements. As a long term budget balancing contribution, this is all smoke and mirrors. (In other words, the change makes the 10 year projected tax revenues look better, at the expense of the 10-20 year revenues.)

I agree that it is politics, not economics, that drives this.

 

[Midpack]

Seems like some premature handwringing to me too since we still don't know the details. There are already many annual limits on $ deferred for IRAs and 401k's. I suspect many/most of us saved tax deferred and taxable most of our working years.

As far as I can tell no one is proposing a limit on how much anyone can save, only a limit of $3M tax deferred. You can still save as much taxable as you want.

Weren't tax deferred accounts meant to encourage/help the middle class accumulate a nest egg? Surely that didn't mean billionaires should be able to accumulate $10B tax deferred (assuming that's not possible, just illustrating the point)? So I assume the handwringing is over what the threshold ($3M?) should be, and not that some accumulated threshold for tax deferred may be appropriate.

Further exaggerating to make the point, surely we don't think everyone should be able to tax defer unlimited amounts...

 

[packrat44]

This is like a game. Taxpayers vs. the Govt. However, the Govt has the addvantage - they make the rules. Everything is fine as long as the Govt is ahead. However, if it looks as though the Taxpayer may pull ahead it is time to change the rules.


If a person is near the $3M cap and over 59 1/2, they might consider converting more of their 401K/TIRA to a ROTH using using some of the exchanged funds for paying the taxes due. This would give the Govt some tax $ now (which they want and are going to get anyway) and allow you a little time until you hit the cap again - repeat.

 

[REWahoo]

I agree that it is politics, not economics, that drives this.

An accurate statement, and applicable to the entire budget proposal as well.

Interesting to see so many folks get their panties in a wad over something that doesn't stand a snowball's chance in hell of passing without prolonged political wrangling and major changes. The end product will likely bear little resemblance to this trial balloon.

 

[jollystomper]

Further exaggerating to make the point, surely we don't think everyone should be able to tax defer unlimited amounts...

Why not?

I guess it depends on one's views...

Did multimillionaires or billionaires earn their money, or did they steal it from society?

If we don't want to judge others based on various ethnic/social categories, are we quick to judge others on what we think should be a livable income for someone else?

Do we care about adding yet more to an already ridiculously complicated tax code, or is the added cost ignored because we think it only affects someone else?

Are government issues primarily a spending problem, or primarily a "not taxing enough" problem?

I do not mean these questions as a rant, but as an observation. Perhaps my upbringing as a child of immigrants, who came to the U.S. because they saw opportunity for unlimited potential as compared to the growing restrictions where they lived is my reason to question this.

 

[FIREd]

Thanks Everyone!

Porky Pig Cartoon Ending "That's All Folks!" - YouTube