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Old 04-14-2013, 07:07 PM   #121
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No. The comment I was replying to said that the change would make planning "unpredictable". That is untrue. It changes the environment within which the planning takes place once, and then it returns to being just as predictable as it is now. Hopefully that makes it clearer.

That's not true, but this isn't the right thread to discuss the reasons why you might not max out your 401k.
While there are rare occasions, when maxing out your 401K isn't the smartest thing to do, for 95% or so of the population, it is. The benefits of tax deferral while in higher tax bracket, tax deferred compounding, and generally a partial company match, outweigh the negatives of smaller number of investment choices, and often higher fees.

If we conducted a poll of the forum members and financial planners maxing out your 401K is going to be the top choice for smart retirement planning

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I max out my 401(k) because I want to defer taxes as much as I am able. With this new system, I would watch my balance and if it got to $3M I would stop contributing.

By the way, my spouse's contract runs out in October, and we won't know until the last minute if she'll be renewed. So managing contributions to her 401k, maximizing her match, is an issue we deal with. It took about three minutes to determine the right approach, given the probabilities. If you need assistance with financial planning, be sure to take advantage of available resources, including online forums.
Why $3 million doesn't this approach mean you will miss out on the free money your company gives you for matching if you hit $3 million long before your retirement age? What if the price of annuities change and the cap increases to $4.5 million? I guess you miss out on all the benefits of tax deferred, company match, because you made your one time decision that once I see $3 million in my account I stop contributing.

Which is my point with the new system it requires you to pay constant attention to your retirement balances, this years cap, and factor in expected returns, company match etc. It is not a one time event. It is also not something that can be done in 3 minutes.

I agree with you about online forums, I wish they were available when I retired. But since I have actually been contributing to them for last 13 years or so. I am one of those resources. I'll spend 30 minutes or an hour reviewing people finances and give them my $.02 on what they should do many people have thank me for my advice.

However I guarantee if anything like the President's proposal comes to pass. This forum and other like we be filled with people asking the question, how much should I contribute to my 401K?. A simplistic answer like until you reach $3 million is wrong for 95% of the people with more than $1 million in IRA/401K, 403B etc. . My answer to their question will be I'll throw up my hands and say hell if I know.

The right answer requires a tool with several time the complexity of FIRECalc and then the best it can do is spit out probabilities. Retirement saving/planning is already too complicated for the vast majority of American the last thing we need is more complexity.
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Old 04-14-2013, 07:56 PM   #122
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While there are rare occasions, when maxing out your 401K isn't the smartest thing to do, for 95% or so of the population, it is. The benefits of tax deferral while in higher tax bracket, tax deferred compounding, and generally a partial company match, outweigh the negatives of smaller number of investment choices, and often higher fees.

If we conducted a poll of the forum members and financial planners maxing out your 401K is going to be the top choice for smart retirement planning

/snip/



Actually, I think you are wrong.... I would bet that a good majority of people should NOT max out their 401(k)... I make good money, but with deductions etc. am at the top of the 15% bracket or just into the 25%... it would be a bad choice for me to put away 15% money tax money... I would rather have the freedom of it being in a taxable account...

I also know a number of people who don't pay taxes at all... it is really stupid to put money aside if you do not save any taxes.... since they say 48% of people do not pay taxes.... that means there is no way 95% should max out....
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Old 04-14-2013, 08:04 PM   #123
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at the top of the 15% bracket or just into the 25%
This might put you into territory where a Roth 401k is better, depending on what you have saved in what kinds of accounts and what income you expect in retirement. Which is another complication to add to planning.
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Old 04-14-2013, 09:11 PM   #124
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This might put you into territory where a Roth 401k is better, depending on what you have saved in what kinds of accounts and what income you expect in retirement. Which is another complication to add to planning.
Exactly. I was using 401K as short hand for taxed deferred investments, which includes Roths, and ROTH 401K Roths.

Texas is right for low wage earnings, you want to contribute as much to your 401K to receive the company match. Beyond that your tax bracket and other investment options matter. However, if you aren't paying taxes or are in the 15% tax bracket you aren't like to accumulate $1 to $2 million in tax deferred account where the restriction will hurt you. But for high wage earners taking maximum advantage of tax deferred is almost always smart. It worked well for me I have 1.4 million in my IRA by maxing out my 401K from 24 to age 40 and never contributing a dime after that.
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Old 04-15-2013, 04:16 AM   #125
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Of course this is exactly the topic we are talking about, retirement account caps. If Obama did this every year for a couple of dozen years he would bit the $3 million cap as well.
Yes, he's clearly not making this decision for his own personal benefit.

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And let's face it, he doesn't really need to "live" on his income at the moment.
Nancy Reagan was famously taken aback when a White House usher presented her first bill in 1981, saying, "Nobody ever told us the president and his wife are charged for every meal, as well as incidentals like dry cleaning, toothpaste, and other toiletries." They don't have to pay rent or for the electric, though.

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The cap is set at the cost of an annuity that would deliver $205K (2013) to someone 62 years of age (adjusted up or down depending on age). Also stated defined benefit plans come into play in determining the cap. Since the President will receive a defined benefit of greater than the cap, does that mean he can not contribute to an IRA/457b and will have to remove whatever he has already contributed?
Again, I suspect that the "have to remove" stuff isn't real... that the rules once written would simply cut-off further contributions. Regardless, yes, I'm sure that it would apply to the President just like it would apply to anyone else.

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While there are rare occasions, when maxing out your 401K isn't the smartest thing to do, for 95% or so of the population, it is.
Yet, with the new rule in place, it is still completely predictable, which is the issue that I was replying to, there.

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The benefits of tax deferral while in higher tax bracket, tax deferred compounding, and generally a partial company match, outweigh the negatives of smaller number of investment choices, and often higher fees.
As I said this isn't the right thread to discuss the reasons why you might not max out your 401k. It is worthy to note that, especially for employees of small businesses, 401k match is an endangered species. (I don't get any, and my spouse won't get any because it is a one year contract and the company has two-year vesting for matching - how nice.) We also get really crappy fund choices: I have only one fund with an ER under 1.3%, and that's a S&P 500 Index fund at 0.86% (which most S&P 500 Index funds are around 0.2%).

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Why $3 million doesn't this approach mean you will miss out on the free money your company gives you for matching if you hit $3 million long before your retirement age?
The way it reads to me: yes. Definitely.

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What if the price of annuities change and the cap increases to $4.5 million? I guess you miss out on all the benefits of tax deferred, company match, because you made your one time decision that once I see $3 million in my account I stop contributing.
Incorrect. You simply restart contributions when you're allowed to. If your company offers you company match, you can take advantage of that. You lucky dog.

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Which is my point with the new system it requires you to pay constant attention to your retirement balances, this years cap, and factor in expected returns, company match etc.
You mean it requires careful planning for retirement? How is that any different from today? Answer: It isn't. As someone who's trying to power though yet-even-more complex decisions right now, I can say that I'm not even slightly concerned about what would extra work this new cap would add in: It would be trivial as compared to what people already need to work through.

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It is not a one time event. It is also not something that can be done in 3 minutes.
Fair enough: 3 minutes a year. Try figuring out how much you're going to use of your HSA each year in such a short period of time. Or which year you're going to take capital gains from a holding you're planning to sell. And so on... Those are regular events for people who have that much money, that they have to do continually, if they're being conscientious about their financial future.

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However I guarantee if anything like the President's proposal comes to pass. This forum and other like we be filled with people asking the question, how much should I contribute to my 401K?
And this forum is a ghost town now? No one has any questions? <shrug>
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Old 04-16-2013, 08:17 AM   #126
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Released yesterday: PLANSPONSOR.com - ERIC Urges Caution on Tax Treatment of Retirement Plans

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In a letter submitted to the House Ways and Means Committee’s Tax Reform Working Group on Pensions and Retirement, Kathryn Ricard, ERIC’s Senior Vice President for Retirement Policy, wrote: “Changing the current tax treatment of employer-sponsored plans would jeopardize the retirement security of tens of millions of workers, impact the role of retirement assets in the capital markets, and create challenges for future generations of retirees in maintaining their quality of life.”
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Old 04-16-2013, 08:38 AM   #127
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From that same source:
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President Obama’s proposal to limit the amount American workers could save for retirement would adversely impact overall retirement savings, as changes to the rules and regulations associated with saving for retirement often have unintended consequences, including a “chilling effect” on savings even by individuals who are unaffected by the rule changes.
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Old 04-16-2013, 08:50 AM   #128
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Sounds like FUD to me. The letter didn't impress me as being particularly based on any real data providing evidence for any of its claims. It makes a lot of loose implications, but doesn't tie any of them back to any evidence specifically related to the specific group of individuals affected (i.e., those who will achieve >$3M in retirement savings). As a matter of fact, the only really defensible point that I could see coming out of the letter (based on the fact that the situation is tenuous because of the voluntary nature of offering 401k plans) is a new law standardizing and requiring 401k plans for all... a retirement ACA.
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Old 04-16-2013, 09:09 AM   #129
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SumDay and growing older, thanks for the update on some of the conversation that is being generated with this proposal. My sentiments exactly. More from the standpoint of having our government mandate "how much is enough" for anyone.
I'm still o.k. in limiting annual contribution amounts and generating more current tax revenue that way, if need be, but having our government implement a max cap on it is disturbing to me. Plus, I don't feel it is necessary. The government WILL get the tax associated with any deferred amounts at some point.
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Old 04-17-2013, 03:51 PM   #130
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I don't think we know.
This says nothing about whether the additional gains (over the "maximum permitted accumulation") will be taxed or not.

"Accrued interest" is a common term, but that use of "accrue" doesn't fit with the clause that follows it in the above quote.

The proposal is so sloppily worded as to, apparently, be a blank slate upon which people can project whatever meaning they prefer. We've seen that technique before . . .it doesn't lead to good outcomes.
The wording in the proposal isn't the language in a law, but I think it's pretty clear that they aren't planning to tax the investment earnings inside IRAs, 401(k)s, etc. The proposal says no new contributions.

The proposal combines DB and DC plans. The limit is actually the combined effect of both. The Treasury puts out some annuity factor, I multiply my DC account balances by that factor to get a monthly income, add that to my DB monthly income (the amount already earned), and compare to the current DB cap, which is the $205k. If I'm over, I can't contribute additional amounts to my DC accounts, and my employer can't grow my DB benefit.

I think the word "accrual" is used to refer to DB benefits. If my DB benefit at the beginning of the year is an annuity of $100k/year, and the benefit at the end of the year is $110/year, then I've "accrued" $10k of new benefits in this year.

For example, this description of current law (my bold)

Quote:
the limitations on accruals under defined benefit plans and the limitations on contributions under defined contribution plans are not applied by aggregating all such arrangements.
or this from the proposed rule:
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Plan sponsors of defined benefit plans would report the amount of the accrued benefit and the accrual for the year, payable in the same form.
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Old 04-17-2013, 04:01 PM   #131
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Released yesterday: In a letter submitted to the House Ways and Means Committee’s Tax Reform Working Group on Pensions and Retirement, Kathryn Ricard, ERIC’s Senior Vice President for Retirement Policy, wrote: “Changing the current tax treatment of employer-sponsored plans would jeopardize the retirement security of tens of millions of workers, impact the role of retirement assets in the capital markets, and create challenges for future generations of retirees in maintaining their quality of life.”
I'd like to see the facts to support the "tens of millions of workers".

This proposal impacts people who are using tax-favored programs to get annual retirement benefits of $205k (not inflation adjusted) or more. What percent of the working population would that be? I'm guessing less than 1%. (What percent of workers earn more than $200k? What replacement ratio are they targeting?)

Since there are about 150 million workers, and "tens of millions" means at least 20 million, they are claiming an impact on at least 20/150 = 13% of all workers. Doesn't pass my smell test.
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Old 04-17-2013, 04:13 PM   #132
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The wording in the proposal isn't the language in a law, but I think it's pretty clear that they aren't planning to tax the investment earnings inside IRAs, 401(k)s, etc. The proposal says no new contributions.

The proposal combines DB and DC plans. The limit is actually the combined effect of both. The Treasury puts out some annuity factor, I multiply my DC account balances by that factor to get a monthly income, add that to my DB monthly income (the amount already earned), and compare to the current DB cap, which is the $205k. If I'm over, I can't contribute additional amounts to my DC accounts, and my employer can't grow my DB benefit.

I think the word "accrual" is used to refer to DB benefits. If my DB benefit at the beginning of the year is an annuity of $100k/year, and the benefit at the end of the year is $110/year, then I've "accrued" $10k of new benefits in this year.

For example, this description of current law (my bold)



or this from the proposed rule:
If this is the case, then the goal is to extend to DC plans what also applies to DB plans. If you read proxy statements you will find that there are plans to make up the pension for execs above the ERISA pension Limit, which is currently $205k per year for 2013. So I suspect that the proposal is a reaction to the change to DC plans and brings them under the cap. Also it brings the cash value DB plan under the limit as well. Currently with a DB pension the benefit is limited, and companies if you read the comp section of the proxy provide a make up plan for execs to handle the overage (a supplemental pension plan or the like, that is just an unsecured debt of the corp.).
So the idea here was to have the tax code catch up to the changes in the benefit landscape, although it sure was communicated badly.
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Old 04-17-2013, 04:38 PM   #133
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The wording in the proposal isn't the language in a law, but I think it's pretty clear that they aren't planning to tax the investment earnings inside IRAs, 401(k)s, etc.
Thanks. We're all groping about here because the language isn't very precise. If you are right then it seems to mean that gains (accruals) in DB plans count, effectively, as contributions (since they'd have to be removed or a tax paid if they exceeded the allowable level) but that gains in DC plans (which any normal person would also call an "accrual") would not. That would be interesting--gains in DC plans would grow unrestricted and untaxed (until withdrawn), but gains in DB plans (over the amount deemed "sufficient" by the government) would not. And since everything is treated in aggregate, the growing DC balance effectively removes the tax advantages on the DB plan (which must be continually reduced to stay under the "allowable" amount).

Those who believe this proposal is intended to put a stop to what Mitt Romney did with his investments will likely be disappointed if your interpretation is correct, because many object to the untaxed >growth< of IRA investments, which would not be addressed if you've got it right.
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Old 04-17-2013, 05:17 PM   #134
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I'd like to see the facts to support the "tens of millions of workers".

This proposal impacts people who are using tax-favored programs to get annual retirement benefits of $205k (not inflation adjusted) or more. What percent of the working population would that be? I'm guessing less than 1%. (What percent of workers earn more than $200k? What replacement ratio are they targeting?)

Since there are about 150 million workers, and "tens of millions" means at least 20 million, they are claiming an impact on at least 20/150 = 13% of all workers. Doesn't pass my smell test.

It probably won't actually impact tens of million but it could easily impact the planning for tens of millions.

Imagine you are doing well and hit $400K by the time you are 40. (A number I hit well before I was 40.) Now 10% returns will have you hit the cap well before you are 65. So a very reasonable approach would be to decrease your contribution to do what is necessary to get the company match.

Of course lots of events could happen to prevent you from ever getting anywhere close to $3 million (job loss, bad investment returns etc.) but most people don't forecast bad stuff happening. While many people on this forum are disciplined enough to cut their 401 contribution from 12% to 5% (company match level) and save the remain 7% in Vanguard index funds, most people are not.

They could easily find themselves out of a job in 20 years with a lot less money then if they had just maxed out their 401K.
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Old 04-17-2013, 08:47 PM   #135
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Thanks. We're all groping about here because the language isn't very precise. If you are right then it seems to mean that

1) gains (accruals) in DB plans count, effectively, as contributions (since they'd have to be removed or a tax paid if they exceeded the allowable level) but that gains in DC plans (which any normal person would also call an "accrual") would not.

2) That would be interesting--gains in DC plans would grow unrestricted and untaxed (until withdrawn), but gains in DB plans (over the amount deemed "sufficient" by the government) would not.

3) And since everything is treated in aggregate, the growing DC balance effectively removes the tax advantages on the DB plan (which must be continually reduced to stay under the "allowable" amount).

4) Those who believe this proposal is intended to put a stop to what Mitt Romney did with his investments will likely be disappointed if your interpretation is correct, because many object to the untaxed >growth< of IRA investments, which would not be addressed if you've got it right.
Lots of stuff here:

1) For DB plans, the sponsor holds assets that are (hopefully) growing with investment returns. Those assets are less than the dollars which are promised to the employee. Each year the plan is supposed to earn, untaxed, investment income that is intended to grow the current assets just enough to eventually pay the benefits. I'd call that investment income "gains". But I think they are using "accruals" to mean new promises of additional benefits according the the benefit formula. Using those words, the "gains" in DB and DC plans are treated the same, they both are earned and not taxed in the year they are earned.

2) As in (1), some investment gains in DB plans are needed just to fund benefits that were earned in the past. No changes there, that's just like DC.
I assume there are current rules for DB plans that have such great investment performance that they are substantially over-funded. I don't know exactly what those rules are - though I think the first thing the employer can do is to stop making new contributions to the over-funded plan. I think they can also use the excess funding to unilaterally increase benefits. And, probably, there is some way to extract it (they may have to close the plan to do that, I'm really stretching here). Under current law, if they use the excess returns to increase existing benefits, they cannot do an increase for someone who has already hit the cap. This proposal doesn't seem to change that.

3) Yes, because everything would be aggregated, a worker could find that his growing DC balance forces him to tell his employer that he cannot accrue any new DB benefits. But, no, I don't see anything that says the employer would have to reduce DB benefits already earned.

4) I agree. Suppose Romney only had one IRA, and he put something in it that somehow met the funding limit, then exploded in value. This does not force him to take any money out of that IRA. It does prevent him from making any new contributions to any IRA or other tax-favored retirement plan. He can't play that card twice.
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Old 04-17-2013, 08:59 PM   #136
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It probably won't actually impact tens of million but it could easily impact the planning for tens of millions.

Imagine you are doing well and hit $400K by the time you are 40. (A number I hit well before I was 40.) Now 10% returns will have you hit the cap well before you are 65. So a very reasonable approach would be to decrease your contribution to do what is necessary to get the company match.

Of course lots of events could happen to prevent you from ever getting anywhere close to $3 million (job loss, bad investment returns etc.) but most people don't forecast bad stuff happening. While many people on this forum are disciplined enough to cut their 401 contribution from 12% to 5% (company match level) and save the remain 7% in Vanguard index funds, most people are not.

They could easily find themselves out of a job in 20 years with a lot less money then if they had just maxed out their 401K.
Based on anything I've read, I'd say that if you hit $400k well before you were 40, you are an extremely rare person. You are in the top 1% of successful savers. I'd also say that if you know how to get inflation + 10% over a 25 year period, you are in the top tier of investors.

The people who are likely to get balances that get them across the line are highly compensated workers. Employers already set up special, non-tax-favored retirement plans for them. (If we had a benefits consultant here, he'd explain to us what companies already do for employees who hit the current DB plan $205k cap.) If this proposal really became law, I expect we'd see employers setting up taxable 401k clones so the highly compensated can still get their match.
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Old 04-18-2013, 12:27 AM   #137
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Based on anything I've read, I'd say that if you hit $400k well before you were 40, you are an extremely rare person. You are in the top 1% of successful savers. I'd also say that if you know how to get inflation + 10% over a 25 year period, you are in the top tier of investors.

The people who are likely to get balances that get them across the line are highly compensated workers. Employers already set up special, non-tax-favored retirement plans for them. (If we had a benefits consultant here, he'd explain to us what companies already do for employees who hit the current DB plan $205k cap.) If this proposal really became law, I expect we'd see employers setting up taxable 401k clones so the highly compensated can still get their match.
I certainly don't know how to get inflation +10%. AFAIK the proposal isn't tied to inflation although that obviously could change, and I agree that I am an above average saver and investor (although there are plenty on this board that are better).

But I think you maybe forgetting what a great run stocks had in the 1980s and 1990.
For instance investing $2,000 a year in the NASDAQ composite (which could be replicated or even exceed with the Janus funds) from 1980 to 1990, and then never adding a dime gave you $350,000 in retirement saving by Jan 2000. I invested more than 2K a year starting in 1983, and my 401K and IRAs were tech focus although I started lighten up in the mid 1990s so I mostly missed the huge run up in my 401K. But still accumulated 400K around 37 or 38 wasn't that hard in bull market.

The point being if the cap existed in 1999 people who were investing from 1980 to 2000, might have looked their account balances in Dec 1999, and decided no need for me to contributed any more because of the cap. They'd wake up a decade later and found they still had $350,000 and that at age 50 age 350K wasn't a ton of money..
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Old 04-18-2013, 09:39 AM   #138
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Based on anything I've read, I'd say that if you hit $400k well before you were 40, you are an extremely rare person. You are in the top 1% of successful savers. I'd also say that if you know how to get inflation + 10% over a 25 year period, you are in the top tier of investors.

The people who are likely to get balances that get them across the line are highly compensated workers. Employers already set up special, non-tax-favored retirement plans for them. (If we had a benefits consultant here, he'd explain to us what companies already do for employees who hit the current DB plan $205k cap.) If this proposal really became law, I expect we'd see employers setting up taxable 401k clones so the highly compensated can still get their match.


They would not have to set up, as you put it, a taxable 401(k)... most large companies already have a non-qualified plan in place for high wage earners... when I was at mega, if you qualified for the plan you got to choose how much of your bonus went into the plan... you did not get to choose the investments, but the money was invested well....

As mentioned, this was considered a general obligation of the company, but I think they had set up a separate company that was BK safe.... IOW, it only held the funds of the executives and if anything went wrong with the main company it was 'safe'.... not sure if this is true...
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Old 04-20-2013, 08:56 AM   #139
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I certainly don't know how to get inflation +10%. AFAIK the proposal isn't tied to inflation although that obviously could change, and I agree that I am an above average saver and investor (although there are plenty on this board that are better).

But I think you maybe forgetting what a great run stocks had in the 1980s and 1990.
For instance investing $2,000 a year in the NASDAQ composite (which could be replicated or even exceed with the Janus funds) from 1980 to 1990, and then never adding a dime gave you $350,000 in retirement saving by Jan 2000. I invested more than 2K a year starting in 1983, and my 401K and IRAs were tech focus although I started lighten up in the mid 1990s so I mostly missed the huge run up in my 401K. But still accumulated 400K around 37 or 38 wasn't that hard in bull market.

The point being if the cap existed in 1999 people who were investing from 1980 to 2000, might have looked their account balances in Dec 1999, and decided no need for me to contributed any more because of the cap. They'd wake up a decade later and found they still had $350,000 and that at age 50 age 350K wasn't a ton of money..
Sorry for the slow response, I had some technical problems.

Yes, this proposal is indexed for inflation. The cap is tied to the maximum DB plan benefit, which is currently $205k. That number has been indexed since EGTRRA was passed in 2001. There is nothing in the proposal about un-indexing it.

I don't understand "no need for me to contribute any more because of the cap". Do you mean "contribute more to my 401k plan"? or "contribute more to my retirement savings"?

There's nothing in the proposal that should change anybody's attitude toward saving for retirement. The only impact would be where they saved.

Suppose I'm a great, 40 year old investor who found that I had $400k in my 401k in 2000. Looking ahead, I can imagine that I will eventually hit the $3.4 million cap on qualified accounts. Further, I can imagine that after I hit that cap, I won't be getting my employer match on my 401k*.

Note that I'm only 12% of the way to the cap, I still have to build up the other 88%. Still, I am so concerned that I may eventually lose some future match, that I decide to put some of this year's retirement saving into an after-tax asset.

In 2001, I discover that my investing genius was just riding a bubble up. My balance drops to $300k. I decide I don't need to worry about building up "too much" qualified plan assets, and I go back to putting all my retirement savings into the 401k. IMO, that's a a very rare story, and it has minimal impact on my eventual financial situation.

I can't imagine anyone who is sharp enough to figure out the 401k match angle, who would simply stop saving money for a decade because he might, someday, be forced to save in non-qualified accounts.

* But, note TP's post above. There's a good chance my employer will find a way to get me the match in a non-qualified plan.
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Old 04-20-2013, 10:16 AM   #140
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* But, note TP's post above. There's a good chance my employer will find a way to get me the match in a non-qualified plan.
Note that in addition to the supplemental plan at my megacorp (retired) you could contribute after tax dollars as well (before roth 401ks were allowed). Again due to lack of details would roths be affected. If roths were still allowed (meaning the deferral of taxes on gains) then you would just switch the place the funds went. I do expect the roths to eventually get RMD's so that they can not become perpetuities as they are now, perhaps on anyone that inherits one.
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