How does budget proposal affect retirement accounts

[ERhoosier]

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.

Must respectfully DISagree. Proposal language can be VERY different from actual legislation/implementation. US has long history of NOT inflation-adjusting important tax-related items. Like traditional IRA contribution limit remaining at $2k from 1982-2001 vs inflation (cumulative) of ~180% (from US BLS inflation calc link below).
http://en.wikipedia.org/wiki/Individual_Retirement_Account
Or AMT's initial exemption of $30k remaining unchanged from 1969-1992 despite (cumulative) inflation of >380%.
Alternative Minimum Tax - Wikipedia, the free encyclopedia
Or personal exemption not rising during certain high inflation periods (e.g. remaining @ $1k from 1979-1984 despite 40+% CPI rise).
http://www.irs.gov/pub/irs-soi/02inpetr.pdf
FWIW- Handy link to US BLs inflation (CPI) calc-
http://www.bls.gov/bls/inflation.htm

 

[Accidental Retiree]

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

And maybe the reason ObGyn65 likes annuities?

 

[marko]

I don't see anything there about determining how much money people are supposed to live on. It seems to be only about how much retirement savings can be tax-advantaged.

Got it.
Of course, the flaw is forgetting that the wealthy always have options.

Cut off a tax benefit in one area and they'll just go in another direction. Financial whack-a-mole. That's one of the reasons they're wealthy.

This plan is less than 6 hours old and you can already hear the wheels turning. Makes everyone feel good though!

 

[harley]

Well the rumor pegs their starting point in excess of five times FPL per year. I think that's a large enough cushion.

Not even close. I have no plans to only be 5x richer than poor. Plus the federal poverty level is ridiculously low. I want the gov't out of my retirement planning even more than I want them out of my bedroom.

Also, I wonder what the plan is for people who invest in something and have it go through the roof, lifting their IRA balances past the limit. Would that require you to convert the difference to taxable? And if so, what about the next year? Once you're at the limit, if your investments grow faster than the CPI you'll go over every year, even without adding to the account. This doesn't sound very well thought out to me.

 

[bUU]

Of course, the flaw is forgetting that the wealthy always have options.

That is always a big concern. That's one of the reasons why these necessary measures need to have so much detail and measures of enforcement in them - aspects that often draw criticism (like the recent criticism of the 23? page application for ACA subsidy) - but your point about the tendency toward abuse makes clear that those criticism are without merit.

Not even close. I have no plans to only be 5x richer than poor.

Yet again: How much richer you plan to be isn't the issue. It's for how much of your retirement savings society benefits from offering you a tax-advantage. Tax laws aren't supposed to be crafted to each taxpayer's own personal benefit, but rather to address society's priorities and objectives. And one of the biggest objectives is reducing deficits, and one way to do that is by not granting tax deferral beyond that which is necessary to lead a reasonably comfortable retirement. It goes hand-in-glove with means-based taxation of social security benefits.

Plus the federal poverty level is ridiculously low.

That just underscores how much further out of balance the ability to afford retirement is, between rich and poor, than the current numbers make it look.

I want the gov't out of my retirement planning even more than I want them out of my bedroom.

Cutting off tax deferral at a certain point is exactly that... the government stepping back away from your retirement planning, after you no longer need their intersession as much as less affluent people need it.

 

[GrayHare]

Tough to see practical restrictions other than a limit on additional IRA contribs, though I can imagine them inventing overly-complex rules for when an individual assumes ownership of a spouse's IRA upon the spouse's death.

 

[jollystomper]

If they are so concerned about folks putting away "too much" in retirement accounts, wouldn't it make more sense to just "means test" for those with large retirement accounts for things like SS and Medicare?

Again it sends the message that saving/investing is bad. As as has been posted before, there has been a bad history of adjusting these things for inflation, because folks get used to the increasing tax stream it generates.

 

[Midpack]

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.

That's how I'm reading it too. It doesn't prevent anyone from accumulating more than $3M, it's simply a limit on tax deferred $. You can save all you want in taxable accounts, so it limits no one, it just caps deferring taxes. That doesn't seem unreasonable to me. YMMV

Home mortgage deductions aren't unlimited either.

 

[MichaelB]

So, is this a limit on how much people can save, is this a limit on how much income people can defer?

 

[samclem]

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

I know for solo 401Ks you have to start reporting the value annually tot he IRS once it exceeds $250K. Maybe the same holds true for "real" 401Ks. The form used is the Form 5500-EZ or Form 5500.

 

[Katsmeow]

I see no indication that this limits how much you can save....just how much you can save in an IRA or 401(k). I don't actually have an issue with it.

 

[harley]

I see no indication that this limits how much you can save....just how much you can save in an IRA or 401(k). I don't actually have an issue with it.

The AMT was intended to hit 155 families when it was implemented. All I can say is...

Unintended Consequences

 

[marko]

If they are so concerned about folks putting away "too much" in retirement accounts, wouldn't it make more sense to just "means test" for those with large retirement accounts for things like SS and Medicare?

Again it sends the message that saving/investing is bad. As as has been posted before, there has been a bad history of adjusting these things for inflation, because folks get used to the increasing tax stream it generates.

I expect that means testing for SS is around the corner in addition to this plan.

Saving/investing isn't 'bad', but in hindsight with all that's going on, I just wish I had burnt through a lot more money in my younger days.

 

[GrayHare]

If a $3m cap applies to 401ks as well, then employers would need to be told "Don't contribute further to my account" which could lead to gravevine whispers as to which employees have more than $3m saved up.

 

[samclem]

So, . . .is this a limit on how much income people can defer?

Sounds like it, but only very roughly. Since it is a cap on allowed tax-deferred account size, a person who has really good investment results in these accounts gets to defer less income than someone who had poor returns.
I think the intent is to do an indirect cap on the income stream from tax deferred accounts. Once a person has "enough" to fund such an income stream, then the rest of the nest egg is subject to taxation.

The "enough" part is a theme we've heard before. The theme resonates with some, but does not bode well for anyone who is dependent on the productivity of others, and that's just about everyone (rich or poor). Productivity is what pays those stock dividends, repays those bonds, and even pays the taxes.

 

[Midpack]

So, is this a limit on how much people can save, is this a limit on how much income people can defer?

If the second link in post #1 is correct it seems only on how much people can defer.

The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts. Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. 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.

I (naively) thought fromt the start that tax deferred accounts were specifically developed to encourage/make it easier for middle and lower income groups to accumulate retirement nest eggs. There's no need for deferrals to have an unlimited upside IMO, accumulation above $3M has to be done in taxable accounts. Unless I'm misinterpreting (entirely possible), again, doesn't seem unreasonable or contrary to the original purpose of tax deferred accounts IMO.

 

[bUU]

If a $3m cap applies to 401ks as well, then employers would need to be told "Don't contribute further to my account" which could lead to gravevine whispers as to which employees have more than $3m saved up.

Where I work, the only people who have access to information about how much each person is contributing are the same people who stuff the quarterly 401k statements in the envelopes and stick them into the mailboxes in the mailroom. It should, of course, be -- no -- remain the employee's responsibility to change their contribution amount when they're over the limit, just like it works today if an employee contributes to two 401k's in the same year. And that change in contribution amount should remain as confidential as any salary-related matter.

 

[samclem]

If a $3m cap applies to 401ks as well, then employers would need to be told "Don't contribute further to my account"

Not necessarily. The employee wouldn't turn away an employer match just because it will be subject to taxation. The 401K account itself wouldn't be impacted at all--just any amounts above $3m will be taxed. And if the market slumps and the 401K decreased below $3m, then it would all again be tax free.

Implementation would be tricky--right now brokers don't track cost basis for IRAs, so it would be a paperwork hassle. Big time.

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

 

[gerrym51]

We LIKE multiplying times the poverty level when it applies to Obamacare subsidies

 

[Running_Man]

The theory that they are not allowing any more contributions over 3 million is not how I am taking it. Since they are expecting to generate 9 billion in tax revenue I think it would make all balances over 3 million subject to immediate taxation, since they are limiting the total balance in tax deferred balances not contributions so that once an account got to 3 million and if the stock market went up 20% you have 600 thousand dollars of taxable income to take in from your deferred tax account, that is how I am reading it.

There is a government exemption for 401K over the normal 401k limit for highly paid executives where individuals can defer income and be matched just like 401K but the money is usually in a seperate Rabbi Trust arrangement where if the company you are working for goes bankrupt your contributions become part of the general creditor claims. This is how people like Mitt Romney end up with huge accounts.
Of course the basic idea is once they get the 3 million level in, dropping to get more income from "rich" people becomes quite more popular with the general population. I could easily see where people in time of tax need would say balances over a million should pay up their taxes.

 

[Running_Man]

Also since the key seems to be the amount needed to fund an annuity of $205,000 if interest rates rise the amount of deferable money could really plummet, making timing of taxes on deferred accounts less definitive

 

[ronocnikral]

The theory that they are not allowing any more contributions over 3 million is not how I am taking it. Since they are expecting to generate 9 billion in tax revenue I think it would make all balances over 3 million subject to immediate taxation, since they are limiting the total balance in tax deferred balances not contributions so that once an account got to 3 million and if the stock market went up 20% you have 600 thousand dollars of taxable income to take in from your deferred tax account, that is how I am reading it.

There is a government exemption for 401K over the normal 401k limit for highly paid executives where individuals can defer income and be matched just like 401K but the money is usually in a seperate Rabbi Trust arrangement where if the company you are working for goes bankrupt your contributions become part of the general creditor claims. This is how people like Mitt Romney end up with huge accounts.
Of course the basic idea is once they get the 3 million level in, dropping to get more income from "rich" people becomes quite more popular with the general population. I could easily see where people in time of tax need would say balances over a million should pay up their taxes.

What get's taxed then and at what rate? $600k at your marginal tax rate? If I have multiple accounts, do I get to juggle where I am taxed? And then a penalty for using that money to pay the IRS? Do I get a credit if market losses take me back under the $3MM mark? What about being "double taxed" on Roth's?

I've always understood taxation on income. This is the first proposal to hit wealth.

I've got my magic number between $3 and $4MM. Of course, I want to pull the plug early and my WR is conservative, and that is in today's dollars. I can see this being a burden in the future for young people like me who saved, but have no plan to live on a $205k/yr lifestyle, or even half of that.

My gut is this won't pass, and I hope for once my gut is correct.

 

[ERhoosier]

The AMT was intended to hit 155 families when it was implemented. All I can say is...

Unintended Consequences

Absolutely. Imposing an arbitrary upper limit on total retirement savings accounts would DIScourage serious investing by imposing a functional success tax. Why take more "risk" if it only exposes you to gov't acct limits The $$ streaming out of US (world) stock markets could make the crash of '08 (or even 1929) look like the Good Old Days.

A fixed $3M overall retirement acct limit is not as generous as it first seems. Today's 23yr old with ave retirement acct deposits (self + employer match) of $10k/yr getting historically ave long-term stock market returns of 8% (less than since 1928,including the Crash) retires at 65 with >$3M balance.

And BTW- If you think these clowns in DC will honestly inflation-adjust that $3M, I've got some top $$ swamp land to sell ya Remember that the home mortgage deduction limit seemed huge back in 1986 when it was set at $1M. But it was NOT indexed. That $1M mortgage was over 12X the ave US home price back then, but now is only ~3X the ave US home price & only 25% above even the FHA loan limit in some high-cost areas (e.g. parts of CA).
Itemized deductions
http://www.census.gov/const/uspricemon.pdf
FHA Loan Limits for CALIFORNIA

 

[Katsmeow]

Absolutely. Imposing an arbitrary upper limit on total retirement savings accounts would DIScourage serious investing by imposing a functional success tax. Why take more "risk" if it only exposes you to gov't acct limits The $$ streaming out of US (world) stock markets could make the crash of '08 (or even 1929) look like the Good Old Days.

http://www.fha.com/lending_limits_state.cfm?state=CALIFORNIA

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. People who want to and are able to save more will do so whether there is an account value limitation in addition to the annual contribution limitation or not. While I might not have liked this personally I think a fairly strong argument can be made that the contribution limits now are too high and that tax deferral on retirement accounts in reality helps most the people who least need the help. I don't see that most low-income or average-income people get all that much benefit from IRAs or 401(k)s. 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.

 

[AndrewJackson]

I am absolutely livid about this. First Cyprus, now this crap. I can't take it any more. Why do they hate the productive middle class so much. Why do they hate people that are extremely frugal and decided to build something. $ 3 million is a lot but who in the hell am I to decide what is and isn't wealthy. And BTW, these numbers will probably end up not being indexed to inflation or to some garbage inflation index making this cap become 1 million in real dollars for those retiring in 20-30 years.

I don't care about the mechanics of this plan or anything else. The fact that it is even proposed to "save" less than a billion a year from the irresponsible congress clowns' deficit is pathetic. This is pure class warfare and needs to be stopped.