The Impact of a Retirement Savings Account Cap

[sheehs1]

But if they want to get more money today, then limit the amount people can put aside today... it is more 'fair' because it is imposed on everybody... also, the poor can not put $20K or more aside each year so it does not affect them... you are not creating any new calculations or forms or anything else... just changing what is already in place.... AND, you will bring in a lot more money than this proposal...

I agree something like this makes more sense and does not feel as much like government intrusion with an imposed lifetime cap.
Just limit the amount that can be deferred each year with all deferred options such as the 401K(already has caps), Simple and SEP IRA's, annuities...etc.

Consequences for the annuity industry? Don't know, but perhaps.

 

[Texas Proud]

It's not me... I'm just reporting how others have interpreted.

Yup, I've pointed that out, but there's still a large percentage of posts (more than half, over the several discussions I've seen) talking about "confiscation" or some other prejudicial characterization of this portion of the proposal. I both agree with your interpretation and hope it is the reality.

OK, fair enough...

I also think that the confiscation talk is a bit over the top... even if it were a hard cap and all amounts over $3 mill were taxed... well, that would be the law. You do not have to invest in a tax advantaged account if you do not want to... you have the choice of paying all your taxes today and not worry about reaching this amount and investing anywhere else you wish...

Now, if it were a hard cap.... (which I do not think it every would be), then I do think that anybody over the cap today should be grandfathered... IOW, it is not fair to change the rules on them after them following them all these years and force a possible big tax bill....

 

[george76]

It think the word accrual is a word used to prevent somebody from putting more money in on a technicality... a boilerplate word... since the previous sentence said specifically an account could grow, why put in sneaky wording to prevent it

That would make sense.

Now, if it were a hard cap.... (which I do not think it every would be), then I do think that anybody over the cap today should be grandfathered... IOW, it is not fair to change the rules on them after them following them all these years and force a possible big tax bill....

+1

 

[bUU]

I think you are splitting hairs with my wording.

I think the distinction is really important. If it isn't a right, then it is something which society offers presumably because offering it is in society's best interest. If that turns out not to really be the case (if it costs society more than is represents value to society) then society shouldn't do it.

I do believe it a "individual right" to be able to save for retirement, tax deferral or not.

I agree, and I haven't seen anyone really dispute that.

No the government does not have to allow us anything but for decades or more they have. So let's just call it something we could do before that may now be in jeopardy after a certain cap level. Notice I said, "after a certain cap level".

Given that the objective of the tax deferral is to motivate people to save for retirement), it is important to note that those who may no longer be offered the incentive are among those least likely to be driven to save for retirement by the incentive the tax deferral offers.

 

[sheehs1]

I think the distinction is really important. If it isn't a right, then it is something which society offers presumably because offering it is in society's best interest. If that turns out not to really be the case (if it costs society more than is represents value to society) then society shouldn't do it.

I agree, and I haven't seen anyone really dispute that.

Given that the objective of the tax deferral is to motivate people to save for retirement), it is important to note that those who may no longer be offered the incentive are among those least likely to be driven to save for retirement by the incentive the tax deferral offers.

bUU, your post #64 seem to indicate "tax deferral was not a right". While I feel it has sort of been a right granted us by our government to save for retirement for x number of decades.

Not sure I totally understand your statement that "those who may no longer be offered the incentive.....are among those least likely to be driven to save for retirement by the incentive" . Meaning, I would think if they are no longer offered the incentive it is because they did save and have reached the cap amount.

 

[bUU]

bUU, your post #64 seem to indicate "tax deferral was not a right". While I feel it has sort of been a right granted us by our government to save for retirement for x number of decades.

Okay, now we are playing semantics. I think it is more accurate to say it is an incentive offered to us by our government for a long time, without a cap, and now it would be offered subject to a cap.

However, as long as we see the two statements as meaning the same thing, then the wording different isn't significant.

Not sure I totally understand your statement that "those who may no longer be offered the incentive.....are among those least likely to be driven to save for retirement by the incentive" . Meaning, I would think if they are no longer offered the incentive it is because they did save and have reached the cap amount.

And therefore be among those least likely to be driven to save for retirement by the incentive.

Perhaps the added emphasis communicates my intended meaning better?

A related story: Walt Disney World is a pretty expensive place. Occasionally, they offer discounts for vacations. I'm not talking about their promotional packages - those often cost the same as the individual pieces at regular price. Rather, there are times when Disney offers quite significant discounts on room rates. However, very often now, they offer those discounts in the form of PIN codes, special codes that you give the reservationist to secure the discount. However, if your name and address don't match that of the person the PIN code was sent to, you don't get the discount. They are very deliberately and explicitly aiming the discount at specific people, based on their understanding of those folks who would tend not to visit their resort this year without the discount.

Of course, the folks who are the biggest Walt Disney World fans originally got pretty upset about this practice. There is a very large contingent of people who visit the resort every year, no matter what, even in years that the discounts were paltry and even in the years that there were no discounts. Many of these people felt entitled to whatever discounts were available. They felt that access to discounted room rates were a "right", and they took great advantage of it, since their fandom furnished them with channels through which they knew precisely when the discounts were released. So generally these repeat visitors, who would have visited every year no matter what, were snagging the discount rates as soon as they were released each year (and I admit our family was part of that crew for some years), essentially giving new or less frequent customers very little opportunity. Disney was deliberately promoting the discounts in specific periodicals, or through targeted mailings to specific market segments, etc., yet that effort was being thwarted by vigorous fandom. Hence the introduction of the PIN codes.

Just like Disney wanted to target these discounts at the people who wouldn't have visited their resort otherwise, government has reason to target the tax deferral at people who would otherwise be less likely to save enough for retirement to preclude becoming dependent on government assistance as elderly people. Both Disney and the government are right to change their practices to more efficiently achieve their intentions.

 

[ShortInSeattle]

Onto the $3MM cap. Being "wet behind the ears" at age 30, I do worry this cap will not be indexed to inflation if implemented. Combine that with a generous 401k match in company stock that doubled, I find myself at age 30 with approximately $300k in IRA's, not including my wife's. Doing some quick calcs, there are scenarios within the realm of possibilities (10% annual avg returns over 25 years or 8% returns over 30 years-when I can more or less start tapping my IRA accounts) where I reach $3MM without ever making another contribution. Of course, I do continue to contribute to my IRA and 401k's (and will likely switch jobs every 2-5 years, meaning I will rollover). While the view of this board is generally of the Boomer generation, my "unicorn" voice is urging caution that the $3MM number is eerily "low" for those who are savers if not indexed to inflation.

+1 I know 3 mill seems like a lot of money, but when SS is still 40 years away and you're looking at the prospect of paying your own healthcare costs for at least 20 years in ER, it becomes a more thinkable sum. 3 Mill at a 3% withdrawal rate is 90k. With inflation, this will probably be a solid but not luxurious retirement in 20-30 years.

I suspect we'll be OK. I assume a married couple will have somewhat higher limits. Besides, we are investing in taxable accounts too. I'm not ready to scream and rend my garments. But the proposal does make me a bit wary.

SIS

 

[bUU]

+1 I know 3 mill seems like a lot of money, but when SS is still 40 years away

I'm still going to expect the $3M to be indexed to CPI.

I assume a married couple will have somewhat higher limits.

The limit applies to each spouse's tax-advantaged accounts separately.

 

[ERhoosier]

Nothing fair about the 3 million dollar cap.
Just my opinion.

As proposed in Budget & Treasury 'Green Book' documents I agree the proposal is not fair. It would not treat all of similar net worth equally. The imputed cap (i.e. PV of IRC-limit of defined benefit retirement pay) includes only value of individual retirement accts but does NOT include value of generous retiree benefit plans of many gov't & corp employees.

 

[ERhoosier]

The limit applies to each spouse's tax-advantaged accounts separately.

This is unclear. Limit for a married couple is not specified in either the Budget or the Green Book.

 

[growing_older]

But retirement accounts as 401k and IRA are always "individual" accounts, not joint. So the logical assumption would be that the limits are for each spouse. Of course if new rules are being invented, there's no reason that cannot be changed too.

 

[meierlde]

+1
I was wondering about inherited IRA's and whether they would be included in the calculation. If so, and if anything like this passes, then I would think our IRA's might be the first thing we should spend rather than the last so as not to impact our children.

.

However I do expect the rules for RMD's for inherited IRAs and 401ks to go to using the founder of a retirement accounts RMD schedule, with the possible exception of a spouse being able to use their RMD schedule. No generation skipping on IRAs and 401ks they need to be depleted by the time the creator would have reached 120 (which is what the current tables do if you lived that long)

 

[clifp]

In the big scheme of things, I just fail to see this as big issue (provided of course that it is limited to NEW contributions).

Think about it this way; if you have $3 million in IRA's and your investment return a conservative 5%, that's $150,000.

Contributions to a 401k for 2013 is limited to $17,500 and about $6,000 for an IRA.

The $17,500 and the $6,000 are peanuts in comparison to the $150,000. This is why I am not too concerned about the proposal. Of course, this assumes as bUU pointed out that it is just limited to NEW contributions.

As I posted in the early thread if I had continued working my IRA would have been 1.9-$2.0 million by age 53. Even with inflation adjustments it turns into 3 million in 10 years with a real return of only 4%, but it is also possible that hits 3 million in just a few years if my investments turn out.

Not only would I lose out on the tax benefits of deferred saving once it hits $3 million but I'd lose out on the benefits of the companies profit sharing which would have been around $10K a year. So in order to avoid missing out the companies profit sharing, logically I stop contributing.

On the other hand if I stop contributing, it is also possible that we have another crappy investment decade and 10 years from now my 401K is still only worth 2 million. Now two million for retirement is a decent amount but with say 3.5% withdrawal rate is $70,000 far from a lavish retirement.

There is enough uncertainty in financial retirement planning as it is that last thing we need is the Government to make even more unpredictable.

 

[bUU]

Limiting how much tax you can defer doesn't make it significantly more unpredictable. It changes the planning once.

 

[freetodream]

Are state, federal and Congressional employees exempt in the proposal? Their pensions are worth a LOT of money. ummmm.....

OK I'll bite on that one! I do have a pension I am very thankful for. I also have had a very modest & secure salary which I am also very thankful for.

A LOT of $ I relative to many on this forum, I do not have. The proposed 3 million cap is a non-issue for me. Except that it implies additional more restrictive future proposals which likely would become an issue for younger w*rkers.

 

[sheehs1]

fishtherainy, I thought I saw where "pensions" were taken into the calculation. If this proposal were to implemented fairly across the board, it begged the question of whether state, federal and Congressional pensions might also be included or if they would be exempt. Don't know the answer to that or the specifics stated in the proposal. Besides I'm sure if the proposal is going to be a serious possibility, it will change as it makes it's way thru any legislative process.

 

[photoguy]

This seems needlessly complex and unequitable due to pensions as Er Hoosier noted (if they are not taken into consideration). I would prefer a solution that adds less rules to the tax code rather than more.

But it's hard for me to get worked up about this because assuming the government is going to raise taxes (or cut deductions), it's going to be this or something similar. I think one of the "positives" of this approach is that if the 3M is indexed to CPI this is only likely to impact people who are very well off who won't have issues funding retirement.

 

[ERhoosier]

But retirement accounts as 401k and IRA are always "individual" accounts, not joint. So the logical assumption would be that the limits are for each spouse. Of course if new rules are being invented, there's no reason that cannot be changed too.

But there are currently some limits on spousal IRA contributions/deductions. Not that same as two individual (non-married) IRA'a.

Publication 590 (2012), Individual Retirement Arrangements (IRAs)

 

[Hamlet]

Rather than capping the amount an IRA can grow to, I think they should review the loopholes that allow private equity types and CEOs to end up with $100 million IRAs by dumping carried interest ultralow basis shares into an IRA, or otherwise having ridiculous amounts of income deferred via these vehicles.

Honestly, how common is it for normal people to end up with more than $3 million in these accounts using the normal rules? It's a lot of screwing around for what is essentially a non-issue.

The issue to me is the people abusing the system with loopholes not available to the general public.

 

[clifp]

Limiting how much tax you can defer doesn't make it significantly more unpredictable. It changes the planning once.

You are kidding right? Right now the process is real simple max out your 401K.

With the cap each and every year.

I have to estimate the following things.
1. Future interest rates (remember a rise in interest rates decreases the amount I need for an annuity)
2. Future inflation also impacts the cap.
3. Future returns
4. Future company profit sharing
5. Future wage increase.

I then would have to go through some type of calculation to attempt to maximize my both my future profit share/company 401K matches while remaining under the cap.

If you think this is easy then I'd love to hear what you would do in this scenario
You have a high paying job say $200K. You have $1.5 million in your 401K/IRA and you just turned 50. You'd like to be retired between 62 and 66. You need at least $150,000 in retirement to support your kid with Downs Syndrome. Your company provides 1/2% match (max 5%) of your 401K contribution and also contribute 0- 7.5% in profit sharing .

How much of your 2013 and 2014 salary to you contribute to your 401K and why?

 

[samclem]

If "fairness" (or "progressivity of the tax code") is the goal, it would seem the most straightforward thing to do is just put a lifetime cap on tax deferred contributions. When you hit the cap, you know you're out of that game and need to find other things to do with your money. You'd get taxed on the gains (and the contributions) when you withdraw them. Index this cap for inflation (which would allow continued contributions by those with income). It's simple.

It has the downside of not appearing to soak the rich, not providing an immediate windfall of revenue to the government, and not providing a recurring source of government revenues every year as the good investments made by the well-off provide high returns that exceed the magic number.

If the government will be taxing the gains made by these accounts (when they exceed the magic number), I wonder if account holders will be allowed to write off losses from these same accounts when they decline in value?

 

[meierlde]

The issue was to prevent what Romney did with putting stock that greatly appreciated into an IRA. So assume you some how knew that stock X was going to go up 500% you would not be affect by the limit although that was the reason the idea was proposed. It might be just that you must put your contributions into a publicly traded stock, etf, mutual fund, or bond fund, not a privately placed stock where this sort of gain is possible. Thus no making out like a bandit on tax deferred money.
Of course I would also change the rules so that inherited IRAs had to take RMD's based upon the creators age, (or in the case of the spouse of the creator, the age of the spouse, but no passing the thing down thru a chain of spouses). The idea here is that an IRA should terminate when the creator would have been 115 since its a retirement account, not a perpetuity.

 

[samclem]

. . . So assume you some how knew that stock X was going to go up 500% . . .

Then I'd leverage the hell out of things using margin and options so I'd be able to buy France in about 2 years. The IRA and tax treatment wouldn't mean anything (just double it again with more options if I know it's going to 500%). But no one does that because no one knows which stocks are going to gain 500%. While most of those people did well (Bain was a well-run company, after all), some didn't.

When the money comes out, it gets taxed. If I (who earned the money and put it in the IRA) can wait for the dough, why can't Uncle Sam? That was the deal he made me when I put it in there.

 

[clifp]

Then I'd leverage the hell out of things using margin and options so I'd be able to buy France in about 2 years. The IRA and tax treatment wouldn't mean anything (just double it again with more options if I know it's going to 500%). But no one does that because no one knows which stocks are going to gain 500%. While most of those people did well (Bain was a well-run company, after all), some didn't.

When the money comes out, it gets taxed. If I (who earned the money and put it in the IRA) can wait for the dough, why can't Uncle Sam? That was the deal he made me when I put it in there.

+1

I tried this trick twice both times w3ith poor results. Several years ago I did a ROTH conversion early in the year and set up 3 accounts, one with a Vanguard total market, another with Asian ETF, and 3rd with some individual stocks at the end of the year and I rolled back (recharacterized) the total market and individual stocks and kept the Asian ETF because it had appreciated the most. I didn't bother to change Asian ETFs and they dramatically underperformed the other assets over the last few years. So even with a year head start 6 years later I didn't pick the right asset class to put in the Roth.

In 2006 I invested money in a quasi mutual of fund tech startups. I thought I'll be smart and make this investment via my IRA rollover, who's distributions aren't taxed by Hawaii. Perhaps if it even goes well I'll turn into a Roth IRA. I figured I'll make a ton of money with these startup just like all the venture capital firms like Bain did. Now in 2013 it looks like I'll be lucky to get $.25 on the dollar.


So for every Romney who made a killing with invested in startup in his IRA, there are several folks like myself who bet badly. Not only did I lose money on the investment but I lost the opportunity to deduct the investment off of my taxes like I would have be able to if I made the investment outside of the IRA.

 

[haha]

My comments are about being concerned over the unintended consequences.

Considering where the proposal came from. I would say the consequences as best as can be foreseen are considered desirable.

Ha