The Impact of a Retirement Savings Account Cap

[sheehs1]

I hate this 'fairness' BS.... a tax should not be imposed to make something look fair... especially if the expense of that tax costs more to collect than the amount of tax... how 'fair' is that

I tend to agree Texas Proud. Instead of soft pedaling it under the premise of "fairness", call it what it is. Our government needs money to fund all of it's expenditures. This is one way it can get it in current years" rather than waiting 10, 15, 20 years or more.

Again, it is simply "fast forwarding" the tax bill and possibly changing the rules people have counted on the last many decades. More symptomatic that our government has not and can not live within it's means or with current tax revenues. For me, that should be what we are all most concerned about! As it spends even more money, it will need even more in future years.

Disclosure: I do not have that amount of money in any tax deferred vehicle. My comments are about being concerned over the unintended consequences.

 

[sheehs1]

Well, I guess part-timers probably do not amass much in the way of pensions, but the proposal does include the value of any defined benefit plan (such as a pension) in the limits. It's of course totally unclear how they figure the value or what happens if the cap is exceeded, or what happens if the combination of future pension and IRA savings exceeds the cap, or vesting, or many other specifics.

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

 

[bUU]

I tend to agree Texas Proud. Instead of soft pedaling it under the premise of "fairness", call it what it is. Our government needs money to fund all of it's expenditures. This is one way it can get it in current years" rather than waiting 10, 15, 20 years or more.

It's both, and there's no reason not to promote it as both.

 

[sheehs1]

Could be, but IIRC that means it would have to come from the House Ways and Means committee, not the White House budget proposal.

Yes and will probably change a lot if it makes it outta there!

 

[sheehs1]

It's both, and there's no reason not to promote it as both.

Do not think I can agree with this. While I don't disagree yearly caps for contributions are helpful in generating tax revenue, I object to the lifetime cap of 3 million and our government telling us "how much is enough".

Why should they care? Particularly if they receive tax money every year on the excess of what a person can contribute. Why should they limit ANYONE to 3 million?

I am sure there are some out there that can make contributions, pay tax on the income they can not route to a tax deferred vehicle and over the years/decades exceed the 3 million.

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

 

[bUU]

Do not think I can agree with this. While I don't disagree yearly caps for contributions are helpful in generating tax revenue, I object to the lifetime cap of 3 million and our government telling us "how much is enough".

That's just it: They are not telling you how much is enough. You can save as much for retirement as you'd like. What they're deciding is how much society should incentivize - how much tax revenue society should do without for the duration, based on how doing so benefits society. The tax advantages offered were originally intended to replace pensions, motivating workers to save for their own retirement, so they don't become so thoroughly dependent on society to afford to live in retirement. Beyond a certain point, society no longer derives that benefit from offering that incentive.

Why should they limit ANYONE to 3 million?

Again, there is nothing about this proposal that limits anyone to any amount of savings for retirement. That's just a red herring, and seems to be used as a catchy rejoinder by partisans in the press trying to make this proposal sound like something it is not. This is just about limiting the granting by society of tax advantages, not the limiting of retirement savings.

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

And my opinion is the opposite, that it is completely fair. We'll just have to agree to disagree.

 

[Bestwifeever]

So basically we will still get to keep using an IRA for the first $3 mil and then more than that can still be invested otherwise and not be tax sheltered like we all did with all our retirement savings before IRSs were started in 1974? Not going to lose sleep over this idea.

 

[george76]

So basically we will still get to keep using an IRA for the first $3 mil and then more than that can still be invested otherwise and not be tax sheltered like we all did with all our retirement savings before IRSs were started in 1974? Not going to lose sleep over this idea.

Even if you have a balance in excess of $3 million you can still reinvest it within the IRA's until it reaches whatever...The only new thing is that you can't add in NEW contributions if you reach $3 million.

It seems like a non-issue, at least to me.

 

[bUU]

Even if you have a balance in excess of $3 million you can still reinvest it within the IRA's until it reaches whatever...The only new thing is that you can't add in NEW contributions if you reach $3 million.

At this time, it's an open question how this would get implemented. It's just a proposal, and it'll surely be refined before it becomes law, if it ever does. Right now, the proposal doesn't say that the impact will be limited to just restricting new contributions. It could theoretically require removal of excess balances, as is the case for 401ks that fail ADP testing, for example. But that's just something that can be changed in negotiations or committee.

 

[george76]

At this time, it's an open question how this would get implemented. It's just a proposal, and it'll surely be refined before it becomes law, if it ever does. Right now, the proposal doesn't say that the impact will be limited to just restricting new contributions. It could theoretically require removal of excess balances, as is the case for 401ks that fail ADP testing, for example. But that's just something that can be changed in negotiations or committee.

My understanding from reading the actual proposal is that, yes it requires the removal of excess balances. But only those excess balances that were due to new contributions. IOW, only the "illegal" contributions would be removed.

http://www.treasury.gov/resource-cen...ons-FY2014.pdf
If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains.
If a taxpayer received a contribution or an accrual that would result in an accumulation in excess of the maximum permitted amount, the excess would be treated in a manner similar to the treatment of an excess deferral under current law


Do you by any chance have a link showing otherwise?

 

[bUU]

My understanding from reading the actual proposal is that, yes it requires the removal of excess balances. But only those excess balances that were due to new contributions. IOW, only the "illegal" contributions would be removed.

http://www.treasury.gov/resource-cen...ons-FY2014.pdf
If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains.
If a taxpayer received a contribution or an accrual that would result in an accumulation in excess of the maximum permitted amount, the excess would be treated in a manner similar to the treatment of an excess deferral under current law


Do you by any chance have a link showing otherwise?

No, that's the exact link and wording, and the part that people latch onto to project the opposite perspective is: "an accrual that would result in an accumulation in excess of the maximum permitted amount".

I agree with you, in that I doubt that this would go into effect having impact on existing balances at the time it goes into effect.

 

[george76]

No, that's the exact link and wording, and the part that people latch onto to project the opposite perspective is: "an accrual that would result in an accumulation in excess of the maximum permitted amount".

I agree with you, in that I doubt that this would go into effect having impact on existing balances at the time it goes into effect.

OK, I follow you.

If that indeed is the case, which really needs to be spelled out, then I am very much against it. Then, in effect, they are penalizing those people that have done a good job investing.

As other have stated, this is just a proposal and hopefully they will adjust it.

 

[sheehs1]

Can't get too worked up over this since it is just a proposal subject to changes.

Just don't think it is right if for example a person is hugely successful and by age 40 or so has 3 million in IRA's. While they may still be able to save for retirement in taxable accounts, they will no longer be permitted contributions in any tax deferred vehicle for the next 20 to 30 plus years. Unless of course the market tanks as has often been the case., and they are allowed additional contributions.

That is conceivably a very long time not to be able to defer even one dollar. Some people will fall into that category. So I also see it as affecting the rights of the hugely successful people. Rights they have had in the past. Cap the yearly contribution amounts perhaps but don't take away all of their cumulative rights to defer something.

 

[bUU]

I don't see tax deferral as a "right".

 

[Midpack]

Can't get too worked up over this since it is just a proposal subject to changes.

Just don't think it is right if for example a person is hugely successful and by age 40 or so has 3 million in IRA's. While they may still be able to save for retirement in taxable accounts, they will no longer be permitted contributions in any tax deferred vehicle for the next 20 to 30 plus years. Unless of course the market tanks as has often been the case., and they are allowed additional contributions.

That is conceivably a very long time not to be able to defer even one dollar. Some people will fall into that category. So I also see it as affecting the rights of the hugely successful people. Rights they have had in the past. Cap the yearly contribution amounts perhaps but don't take away all of their cumulative rights to defer something.

First and foremost, tax deferred accounts were meant to encourage retirement investment for folks who might not otherwise have a nest egg - see quote below.

But let me exaggerate only to illustrate the issue. The Fed Govt needs revenue coming in every year to meeting each years spending obligations. If everyone was allowed to defer as much as they wanted with no annual limits (already in place) and no maximum cap (proposed), the only FIT revenue the government would receive currently might be only on partial wage income, only that wage earners could not afford to defer. Why would you hold anything in taxable accounts that you could defer? People might put most or all their investments in deferred accounts and forestall those taxes (on interest, dividends, CG, etc.) for 20-30 years or more. Who knows, the billionaires might have billions all tax deferred if it was perfectly legal. So arguably there has to be some limit on deferrals to fund current federal revenue needs. We may disagree about how the limits are fashioned, but hopefully we can agree it can't be unlimited. So we can agre ther need to be on some limits?

IRA's were implemented as a way to encourage people who were not saving for retirement to do so, by giving them a tax incentive (deferral) on that savings. Contribution caps and MRD's were put in place to discourage people from trying to use these accounts to accumulate significant wealth without first paying income tax on it and pass that untaxed wealth on to heirs. Sounds to me like the limits being proposed now are just another way the government is trying to reinforce the original purpose of IRA's...to provide retirement income for those who otherwise might not have any.

 

[Texas Proud]

I tend to agree Texas Proud. Instead of soft pedaling it under the premise of "fairness", call it what it is. Our government needs money to fund all of it's expenditures. This is one way it can get it in current years" rather than waiting 10, 15, 20 years or more.

Again, it is simply "fast forwarding" the tax bill and possibly changing the rules people have counted on the last many decades. More symptomatic that our government has not and can not live within it's means or with current tax revenues. For me, that should be what we are all most concerned about! As it spends even more money, it will need even more in future years.

Disclosure: I do not have that amount of money in any tax deferred vehicle. My comments are about being concerned over the unintended consequences.

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...

 

[Texas Proud]

No, that's the exact link and wording, and the part that people latch onto to project the opposite perspective is: "an accrual that would result in an accumulation in excess of the maximum permitted amount".

I agree with you, in that I doubt that this would go into effect having impact on existing balances at the time it goes into effect.

I think you are misinterpreting accrual.... the next sentence of the quote say that it does not affect earnings....

"If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains. "

 

[george76]

Can't get too worked up over this since it is just a proposal subject to changes.

Just don't think it is right if for example a person is hugely successful and by age 40 or so has 3 million in IRA's. While they may still be able to save for retirement in taxable accounts, they will no longer be permitted contributions in any tax deferred vehicle for the next 20 to 30 plus years. Unless of course the market tanks as has often been the case., and they are allowed additional contributions.

That is conceivably a very long time not to be able to defer even one dollar. Some people will fall into that category. So I also see it as affecting the rights of the hugely successful people. Rights they have had in the past. Cap the yearly contribution amounts perhaps but don't take away all of their cumulative rights to defer something.

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.

 

[george76]

I think you are misinterpreting accrual.... the next sentence of the quote say that it does not affect earnings....

"If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains. "

Texas Proud,

I agree with what you wrote. But then the next sentence after that it says the following:

If a taxpayer received a contribution or an accrual that would result in an accumulation in excess of the maximum permitted amount, the excess would be treated in a manner similar to the treatment of an excess deferral under current law.

It is this last sentence that confuses me. I know what the word accrual means in regular bookeeping/accounting. But what do they mean by the word accrual within this context?

 

[ronocnikral]

But let me exaggerate to illustrate the issue. The Fed Govt needs revenue coming in every year to meeting each years spending obligations. If everyone was allowed to defer as much as they wanted with no annual limits (already in place) and no maximum cap (proposed), the only FIT revenue the government would receive currently might be only on partial wage income, only that wage earners could not afford to defer. Why would you hold anything in taxable accounts? People might put most or all their investments in deferred accounts and forestall those taxes (on interest, dividends, CG, etc.) for 20-30 years or more. Who knows, the billionaires might have billions all tax deferred if it was perfectly legal. So arguably there has to be some limit on deferrals to fund current federal revenue needs. We may disagree about how the limits are fashioned, but hopefully we can agree it can't be unlimited. So we can agre ther need to be on some limits?

And this is why I believe the Roth will never go away. Especially all those highly income people who think they are getting a grand deal from the government. The government gets paid today, and most likely at a higher rate, even in a lot of cases compared to someone putting it in a taxable account. Plus, the government then gets to come up with ideas how to "tax" those with Roth accounts later on down the road.

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.

 

[scrinch]

Even if you have a balance in excess of $3 million you can still reinvest it within the IRA's until it reaches whatever...The only new thing is that you can't add in NEW contributions if you reach $3 million.

It seems like a non-issue, at least to me.

+1!

 

[kmt1972]

It does not affect me but while I have no objections to this in theory I feel $3 million cap is too low. I have lots of friends who are self-employed and they make less money than they could have at megacorp mainly because of the fact that they can put $50K away every year in their IRAs tax free. Some of them already have $3 million in their IRAs and this can impact them. It seems if the cap will be $3 million then it should be phased in to take into account the career choices people have made based on this tax law so they can adjust.

 

[bUU]

I think you are misinterpreting accrual....

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

"If a taxpayer reached the maximum permitted accumulation, no further contributions or accruals would be permitted, but the taxpayer’s account balance could continue to grow with investment earnings and gains. "

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.

 

[sheehs1]

I don't see tax deferral as a "right".

I think you are splitting hairs with my wording. I do believe it a "individual right" to be able to save for retirement, tax deferral or not. 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".

While others here may not see a problem with it, we obviously are not in the same shoes of those that may be affected by it now....or in the future.

 

[Texas Proud]

Texas Proud,

I agree with what you wrote. But then the next sentence after that it says the following:

If a taxpayer received a contribution or an accrual that would result in an accumulation in excess of the maximum permitted amount, the excess would be treated in a manner similar to the treatment of an excess deferral under current law.

It is this last sentence that confuses me. I know what the word accrual means in regular bookeeping/accounting. But what do they mean by the word accrual within this context?

A company does not have to contribute cash to put something in your account... they can make an entry in their books and move treasury stock to your account... I can also see where they could 'accrue' a contribution to your account, but not fund the pension plan... we all know about the various state gvmts who have been doing this for a long time...

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