The Impact of a Retirement Savings Account Cap

[SumDay]

WASHINGTON—This week President Obama is expected to unveil his 2014 budget proposal–
and published reports indicate it will include a cap on retirement savings.
In statements released ahead of its official publication, the White House has noted that the
budget will include a new proposal that prohibits individuals from accumulating over $3 million
in Individual Retirement Accounts (IRAs) and other tax-preferred retirement accounts, such as​

401(k) plans. How many individuals might be affected by that cap?

http://www.ebri.org/pdf/PR-1017.Advise.10Apr13.RetCap.pdf

If this is being discussed here, I apologize, but I don't see it anywhere. I'm sure our ever-vigilant moderators will move it where it needs to be (political, maybe?). Seems like this would be something members of this forum would be interested in, although it doesn't impact me (yet).

 

[MichaelB]

It's been discussed before, but the threads end up with a visit from Mr Porky. Maybe this one will be different. Also relocated to the "Politics and Fire" forum.

 

[SumDay]

I LOVE bacon. It's my favorite food group.

 

[Texas Proud]

It's been discussed before, but the threads end up with a visit from Mr Porky. Maybe this one will be different. Also relocated to the "Politics and Fire" forum.

I do hope this one stays open... I think there were some good posts on the last one...

I will throw in my opinion here just in case

I would bet that the $3 million is a trigger to allow investing or not.... not a ceiling you cannot go above... right now there are triggers for investing in an IRA... if you are single and make more than X dollars you can not invest... this is just looking at a different number...


But, I could be wrong....

 

[Midpack]

I don't see anything wrong with it as a proposal. They're proposing limiting how much an individual can have in deferred accounts. Several people have [-]tried to spin it[/-] seemingly misintrepreted it to mean a limit on how much one can save - you can save & invest all you want in taxable like always.

Annual IRA & 401k limits have been around for along time, and RMD rules have too. We didn't have IRAs, 401ks and many of the deferred investment options when I was younger, but now some are up in arms at a $3M limit on deferred accounts?

We do need current revenue to fund federal/state/local spending, there has to be a limit on how much we can defer.

I must be missing something (wouldn't be the first time)?

 

[RetiringAt55]

I thought they said "tax advantaged" not "tax deferred", so it could include Roths as well. I am also interested in hearing if it would be $6M for a couple.

 

[ShortInSeattle]

I thought they said "tax advantaged" not "tax deferred", so it could include Roths as well. I am also interested in hearing if it would be $6M for a couple.

Yes, and what happens of portfolio growth pushes you above the limit? Are you forced to take a distribution? Devil in the details......

 

[gerrym51]

i read somewhere about annuitys bringing the cap down to 210,000 dollars. i can't remember where i read it. if someone knows please post a link

 

[george76]

I would bet that the $3 million is a trigger to allow investing or not.... not a ceiling you cannot go above... right now there are triggers for investing in an IRA... if you are single and make more than X dollars you can not invest... this is just looking at a different number...


But, I could be wrong....

Just to be clear. One would still be able to invest within any type of IRA whether the sum of the accounts are above or below the $3 million. The new difference is that one could no longer contribute additional dollars that wasn't in the account before to any IRA account if one's balance has reached the $3 million. At least that's how I understand it...

I wonder how this would impact conversion of TIRA accounts to Roth IRA accounts if one had a ROTH IRA balance in excess of $3million. Would that still be allowed?

 

[FinanceDude]

It's the first step in a "capture" by the govt of 401K assets. Any talk of privatizing involved pitchforks and torches, but I guess a power grab by the State is ok...............

Roth IRA accounts will be phased out at some point....get yours while they are hot........

 

[Midpack]

I thought they said "tax advantaged" not "tax deferred", so it could include Roths as well. I am also interested in hearing if it would be $6M for a couple.

The term I read was "tax preferred" whatever that includes. You'd think Roth IRAs might be excluded since taxes are paid upfront, but I haven't seen how this impacts Roth IRAs yet either.

 

[george76]

The term I read was "tax preferred" whatever that includes. You'd think Roth IRAs might be excluded since taxes are paid upfront, but I haven't seen how this impacts Roth IRAs either yet.

It looks like they are included. This from bloomberg:

The limit would be set starting at $3.4 million, the amount needed to fund a $205,000 annual annuity for a 62-year-old, and be indexed for inflation. Balances from Roth IRAs and the value of defined benefit plans would count toward the cap, said a Treasury official who briefed reporters on the condition of anonymity.
Obama Squeeze on Savings of Wealthy Muddles Estate Plans - Bloomberg

 

[SumDay]

I'm sharing this, but not telling where I got it.

Once the combined value of DB and DC benefits reaches the threshold, accruals and contributions would have to cease (although investment earnings would still grow). Subsequent accruals or contributions would be immediately taxable to the extent the participant’s accumulations remain above the threshold. Excess accruals or contributions not withdrawn within a grace period would be subject to double tax when distributed.

Obviously, this is a PROPOSAL, and what actually may pass will probably look quite different.

 

[ERhoosier]

According to what I've read, this budget feature is not a hard $ cap but a statement that value of aggregate retirement accounts could not exceed that which would finance a $205k/yr annuity (current IRC code limit for defined benefit retirement plans). In current interest rate environment this is ~$3M, but could easily be MUCH lower if interest rates rise. For such a (relatively) small net revenue increase (~$900M (not B) per yr) I would think it would not be worth the ultimate costs of accounting & individual IRS legal rulings/challenges.
Obama proposes limits on retirement tax breaks - Apr. 10, 2013
Obama Budget Is Siren Call On Taxing The Rich - Forbes
FWIW- In the opinion of most pundits (both sides of political spectrum) this proposal is ground breaking in that gov't would require unscheduled (unplanned) action based on the the net VALUE of retirement accounts in requiring early distributions with associated taxes & apparently early WD penalties. This is is quite different from limiting annual contributions or requiring RMD at a certain set age. The market effects of such a hard limit on qualified retirement plan assets are unknown. For example- Would those near the $3M limit at ER be more likely to invest in a variable annuity now to avoid being hit with taxes/penalties in the future if their conventional retirement accts were to rise dramatically in value

 

[george76]

FWIW- In the opinion of most pundits (both sides of political spectrum) this proposal is ground breaking in that gov't would require unscheduled (unplanned) action based on the the net VALUE of retirement accounts in requiring early distributions with associated taxes & apparently early WD penalties. This is is quite different from limiting annual contributions or requiring RMD at a certain set age.

I am confused. If we go above the $3million (or whatever the value is deemed at the time), do we have to remove ALL the excess or only the contributions that were made since we went above $3million? It makes a big difference.

And on your link it not clear either. Your link says the following:

Balances would be reviewed at the end of the calendar year, and no additional contributions would be permitted if a balance exceeds the limit, according to the Treasury Department. Those who exceed the account limit would be given a grace period to remove the excess money, and tax would apply. If an account drops below the limit, contributions could continue.

With "remove the excess money", do they mean just the contributions or ANY excess?

 

[ERhoosier]

Just found the actual Gov't explanation of the proposed retirement plan limit. It's on pages 165-167 in Treasury's Green Book , which is released as "General Explanations" along with Budget.

http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf

The proposed limit, as well as double taxation of excess contributions, would include Roth IRA (p 167).

 

[ERhoosier]

george76-

I've read the Treasury doc & remain unclear on that point too. Here's quote from Treasury Green Book p 167-
"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. Thus, the taxpayer would have to include the amount of the resulting excess accumulation in current income and would be allowed a grace period during which the taxpayer could withdraw the excess from the account or plan in order to comply with the limit. If the taxpayer did not withdraw the excess contribution (or excess accrual), then the excess amounts and attributable earnings would be subject to income tax when distributed, without any adjustment for basis (and without regard to whether the distribution is made from a Roth IRA or a designated Roth account within a plan)."

I guess it's open to interpretation precisely what items "accrual" (vs "contribution") as used in this para includes.

 

[george76]

Just found the actual Gov't explanation of the proposed retirement plan limit. It's on pages 165-167 in Treasury's Green Book , which is released as "General Explanations" along with Budget.

http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf

The proposed limit, as well as double taxation of excess contributions, would include Roth IRA (p 167).

I just read the link. In it I found the following:

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

In other words, there is no mention of requiring forced early distributions etc of anything in the account, other than the contribution itself. And this, at least to me, would not amount to much. So, while the proposal seemed threatening at first, it now is something I can live with.


.

 

[george76]

george76-

I've read the Treasury doc & remain unclear on that point too. Here's quote from Treasury Green Book p 167-
"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. Thus, the taxpayer would have to include the amount of the resulting excess accumulation in current income and would be allowed a grace period during which the taxpayer could withdraw the excess from the account or plan in order to comply with the limit. If the taxpayer did not withdraw the excess contribution (or excess accrual), then the excess amounts and attributable earnings would be subject to income tax when distributed, without any adjustment for basis (and without regard to whether the distribution is made from a Roth IRA or a designated Roth account within a plan)."

I guess it's open to interpretation precisely what items "accrual" (vs "contribution") as used in this para includes.

Oops, I must have responded just before you posted.

Yeah, I don't know what accrual means. It might be an obvious term to a tax accountant, but I haven't heard the term before relating to IRA's. I guess that term is key here. If it is just another way of saying contribution, then I am not concerned. But if not, then it becomes an issue.

 

[Texas Proud]

Just to be clear. One would still be able to invest within any type of IRA whether the sum of the accounts are above or below the $3 million. The new difference is that one could no longer contribute additional dollars that wasn't in the account before to any IRA account if one's balance has reached the $3 million. At least that's how I understand it...

I wonder how this would impact conversion of TIRA accounts to Roth IRA accounts if one had a ROTH IRA balance in excess of $3million. Would that still be allowed?

True... I should have said investing NEW money into the accounts...


IMO, again with no basis in anything but a hunch, they will combine all accounts for this limit... so even a TIRA would be added into the mix... now, they might allow a deduction for basis, but who knows...

 

[samclem]

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

And the treatment of these excess funds upon distribution? It sounds like another case like the situation with tIRAs that hold both tax before and after tax contributions--a giant ongoing accounting PITA.

 

[george76]

And the treatment of these excess funds upon distribution? It sounds like another case like the situation with tIRAs that hold both tax before and after tax contributions--a giant ongoing accounting PITA.

I could be wrong, but I don't think this is much of an issue.

The only time it could be an issue is if an account holder is close to the $3 million mark. If the account holder is materially below it, as the vast majority of Americans are, it is a non-issue. If the account holder is materially above it, then there is no reason for the account holder to contribute money to the account in the first place since it would have to be withdrawn anyway.

 

[heeyy_joe]

Yea! I can get to 3 million dollars! All I have to do is save $6000 annually at a compounded return of 10% for 40 years.

 

[Texas Proud]

Yea! I can get to 3 million dollars! All I have to do is save $6000 annually at a compounded return of 10% for 40 years.

Had to check... but you are not quite there at 40 years... need a few months more to get there...

Now, compound at 12% and it is only 36 years...

 

[keegs]

Highly compensated employees have been subject to limits on contributions for years.