How does budget proposal affect retirement accounts

[growing_older]

There are news reports covering the newly proposed budget:

Obama budget to offer program cuts, seek deficit deal: official | Reuters

OBAMA BUDGET includes chained CPI, in effort to revive talks -- HOUSE IMMIGRATION PLAN soon -- ROGER EBERT'S last post -- THE FIRST Playbook Deal du Jour - POLITICO Playbook - POLITICO.com

Quote:

In addition, the president will seek to increase revenues by placing a $3 million upper limit on tax-preferred retirement accounts

Quote:

The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts.

I doubt I will ever have that much accumulated, but with inflation and a long life, I could easily see my kids accounts reaching these limits,. Does anyone know any more about this proposal. Is this just a trial balloon? What happens when an account reaches this size? Do they simply allow no more contributions? Per account, or adding all accounts in all the various tax deferred and tax advantaged programs combined? Far too many details needed to understand this for a single sentence in a news report to tell me enough about it. Lots of googling didn't turn up much more detail.

[gauss]

Quote:

Originally Posted by growing_older Per account, or adding all accounts in all the various tax deferred and tax advantaged programs combined?

From the second link that you provided:

"The budget would limit an individual’s 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."

This implies to me that this is NOT per account, but rather an aggregate limit.

-gauss

[gerrym51]

Quote:

Originally Posted by gauss From the second link that you provided: "The budget would limit an individual’s 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." This implies to me that this is NOT per account, but rather an aggregate limit. -gauss

i don't have 3 million in accounts but i do imagine some do.

doesn't this seem like what happened at cyprus banks

[heeyy_joe]

"The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts".

a.k.a "The Romney Rule".

[bUU]

Quote:

Originally Posted by growing_older I doubt I will ever have that much accumulated, but with inflation and a long life, I could easily see my kids accounts reaching these limits.

I would hope that if such a rule ever becomes reality that it is, like many other dollar amounts in recent legislation, tied to CPI-U.

Quote:

Originally Posted by growing_older Is this just a trial balloon? What happens when an account reaches this size? Do they simply allow no more contributions?

Good question, but I think we can rest assured that, at least part of it would be handled the way excess contributions within a year are handled, i.e., no longer being allowed to contribute, and having to back-out excess contributions that you shouldn't have made in the first place, but were allowed to because you didn't inform custodians to stop taking contributions.

I would think, though, to make this operational, that the rule would have to prohibit contributions in any year when the closing balance of all such accounts the year prior (or the year before that, perhaps) exceeded the limit. I don't see anyone expecting people to monitor their account balances as often as, say, I do.

Quote:

Originally Posted by gerrym51 i don't have 3 million in accounts but i do imagine some do. doesn't this seem like what happened at cyprus banks

Not even a little bit.

[hsv_climber]

Quote:

Originally Posted by growing_older I doubt I will ever have that much accumulated, but with inflation and a long life, I could easily see my kids accounts reaching these limits

The language of the proposal makes it sound like it is inflation-adjusted number, i.e. just like tax brackets, annual IRA limits, etc.
So, you don't need to worry about inflation.

[hsv_climber]

Interesting question - does IRS even knows the size of someone's IRA accounts?
I don't think brokerages & banks currently report this info to anyone.

[bUU]

It's required on Form 8606. There's no reason why that disclosure requirement cannot be moved/copied to some other forms.

[gauss]

Quote:

Originally Posted by hsv_climber Interesting question - does IRS even knows the size of someone's IRA accounts? I don't think brokerages & banks currently report this info to anyone.

I think it is reported now.

From 5498 - Box 5 "Fair Market Value"
The form typically is mailed to you & IRS in the summer time.

-gauss

[hsv_climber]

Quote:

Originally Posted by gauss I think it is reported now. From 5498 - Box 5 "Fair Market Value" The form typically is mailed to you & IRS in the summer time. -gauss

Good point. But it does not cover all the plans, e.g. it does not cover 401Ks.

[bUU]

True and neither does Form 8606, but surely the disclosure requirements can be changed. That's a simple matter.

[urn2bfree]

From this article about the President's proposed budget:

Obama budget would cut entitlements in exchange for tax increases - The Washington Post

Quote:

Officials ...would also seek to generate revenue by limiting how much wealthy individuals can accrue in their tax-retirement accounts. Such accounts would be capped at $3 million in 2013 dollars — which officials say is enough to finance a $205,000 a year income.

How can $3M finance $205,000 a year? That is a 6.8% withdrawl rate. Or are they just taking a flat split of the money over the life expectancy at an assumed age 65 retirement and dividing it? Either way that is ridiculous and misleading. Inflation will reduce if it is not in the market and heaven forbid you outlive the calculation...And even if in the market you cannot expect market fluctuations will allow for withdrawl like that.
Just asking from a math NOT a political standpoint...am I missing something or are they?

[MichaelB]

There is already a thread on this so I will merge

[Texas Proud]

Be aware that a lot of high paid employees have big retirement accounts...


One of the questions I have is will this cover the non-qualified accounts out there.... I doubt it will... this is where high earners put their money...

[urn2bfree]

So are they saying it will buy an annuity of $205,000/year--presumably which is not adjusted for inflation? Help me out. How does that work? Annuity is prepared to guarantee me $205,000 a year (not adjusted for inflation) from age 65 on if I give them $3Million at age 65?

[bUU]

I'm not sure the numbers are precise, but they seem pretty close. I just checked a few calculators and they're all in the same range, turning a $3M deposit into a revenue stream of almost $15K per month. Not quite $205K, but close to it.

[gauss]

Quote:

Originally Posted by urn2bfree How can $3M finance $205,000 a year? That is a 6.8% withdrawl rate. Or are they just taking a flat split of the money over the life expectancy at an assumed age 65 retirement and dividing it? Either way that is ridiculous and misleading. Inflation will reduce if it is not in the market and heaven forbid you outlive the calculation...And even if in the market you cannot expect market fluctuations will allow for withdrawl like that. Just asking from a math NOT a political standpoint...am I missing something or are they?

I would imagine that the "Mortality Credits" would make up a significant part of the 6.8% vs a normal SWR. That is to say, once you buy the annuity, the insurance company keeps the money -- even if you die sooner than average. The funds from the deceased subsidize those who live longer.

-gauss

[Running_Man]

Obama Wants To Limit Retirement Accounts - Reason 24/7 : Reason.com

For most people this will be a non-issue I would think, but in the future if they do not index this for inflation, it could come into play quite a bit. Will be interesting to see exactly how this would be calculated.

[donheff]

I expect that if something like this was implemented the $3M cap would simply be a limit that would block further tax differed additions to the account from current income. A limit that included growth within the account would be difficult to administer. Excess growth and dividends would have to be withdrawn and saved in a taxed account, would a penalty apply if under 59 1/2?

[haha]

Quote:

Originally Posted by hsv_climber Interesting question - does IRS even knows the size of someone's IRA accounts? I don't think brokerages & banks currently report this info to anyone.

Look at your year end filings. They get everything; they are not going to let this much money get lost.

Ha