Obama Plan: Cut tax breaks in Retirement accounts for the Rich (401ks)

[soccerluvof4]

http://www.marketwatch.com/story/obama-plan-cut-tax-breaks-for-rich-retirement-savers-2014-02-21?dist=beforebell 

Pension plans would most likely be effected as well and since I "play" the market I am sure this will stall and cause a reversal. Have some dry powder in my opinion ready. The talks alone will drive this.

[matchewed]

So you're going to not invest and sit on dry powder for something that may or may not become law and even if it does it would go into effect in 2015 and have little to no actual effect on actual the performance of most companies in the world? K

You may have an overinflated view as to the actual influence a president has on the economy.

[GlassStash]

"Based on current tax brackets, Pensions & Investments reported that the 28% limit would reduce the tax advantages of retirement savings for people earning more than $183,000 or couples earning more than $225,000. And the overall cap for all tax-preferred retirement accounts would limit them to providing an annual retirement income of $205,000, which would currently cap tax-preferred accounts at $3.4 million, but could go lower as interest rates rise."

While this may have an effect on the market in the short term, it doesn't really affect most people - Mustachians especially. The bit about a retirement income of $205k is such an absurdly high number that I laughed out loud.

[Midwest]

So people aren't saving enough for retirement and the answer is to make it more complex and less beneficial for certain parties?  I realize this is simply for the so-called wealthy, but doesn't make a lot of sense.

Midwest

[GlassStash]

So people aren't saving enough for retirement and the answer is to make it more complex and less beneficial for certain parties?  I realize this is simply for the so-called wealthy, but doesn't make a lot of sense.

Midwest

This is a non sequitur.

The people who aren't saving for retirement are not the wealthy. This plan only affects the wealthy. How does it follow that the plan doesn't make sense?

[soccerluvof4]

So you're going to not invest and sit on dry powder for something that may or may not become law and even if it does it would go into effect in 2015 and have little to no actual effect on actual the performance of most companies in the world? K

You may have an overinflated view as to the actual influence a president has on the economy.

I did not say that. But i also do not think I have an over inflated view of the president view of the Economy. Of course i am not going to stop investing that would be moronic. I just shared a link so I dont think you should assume what you might think are my views and or positions on such link. If and when the talks begin I will find areas i believe to be opportunistic. But to say the Presidents comments cannot move the market one way or another is also Naive.

[ncornilsen]

I don't like this plan. It adds yet another layer of complexity to our tax code, for the paltry gain to government income of $1Billion.   I'll bet the cumulative marginal effort expended by the population of the US doing their taxes with this new rule in place will end up costing more than 1Billion anyway.

Of course, that $1 billion per year increase in revenues should indicate how little of an effect this will have on our economy anyway.  I'll bet this is a non-event.

[foobar]

Maybe the boss cuts out the 401(k) because he can't contribute? It is sort of dumb in that the people it affects are the working upper class (think doctor making 500k/yr who has been saving 50k/yr)  not the rich guy making 10 million (these account are a fraction of their networth. Mitt is the exception). Personally I am waiting to learn that some guy has a 1 billion dollar ROTH ira (imagine the whatsapp guy  allowing is IRA to buy 100 bucks of founding stock) to see how everyone reacts. Or when we learn that someone worth 3 million dollars is getting ACA subsidies......

But wasting anytime worrying about this until a bill at least shows up in congress is dumb. There are 100's of proposals that get made and only a couple make it into law.

So people aren't saving enough for retirement and the answer is to make it more complex and less beneficial for certain parties?  I realize this is simply for the so-called wealthy, but doesn't make a lot of sense.

Midwest

This is a non sequitur.

The people who aren't saving for retirement are not the wealthy. This plan only affects the wealthy. How does it follow that the plan doesn't make sense?

[Another Reader]

Just another step on the path to limiting and annuitizing your retirement accounts.  God forbid we should encourage folks to save and invest for themselves.  Change your investing?  Thieves and parasites are everywhere.  Carry on.

[GlassStash]

Maybe the boss cuts out the 401(k) because he can't contribute? It is sort of dumb in that the people it affects are the working upper class (think doctor making 500k/yr who has been saving 50k/yr)  not the rich guy making 10 million (these account are a fraction of their networth. Mitt is the exception). Personally I am waiting to learn that some guy has a 1 billion dollar ROTH ira (imagine the whatsapp guy  allowing is IRA to buy 100 bucks of founding stock) to see how everyone reacts. Or when we learn that someone worth 3 million dollars is getting ACA subsidies......

But wasting anytime worrying about this until a bill at least shows up in congress is dumb. There are 100's of proposals that get made and only a couple make it into law.

So people aren't saving enough for retirement and the answer is to make it more complex and less beneficial for certain parties?  I realize this is simply for the so-called wealthy, but doesn't make a lot of sense.

Midwest

This is a non sequitur.

The people who aren't saving for retirement are not the wealthy. This plan only affects the wealthy. How does it follow that the plan doesn't make sense?

Maybe he does, maybe he doesn't. I was merely pointing out that while there are reasons this plan doesn't make sense, it's non-impact on people who don't save anyway is not one of those reasons.

[Midwest]

"Wealthy" is defined as $183k for an individual or "$225k for a couple.  There are plenty of people in that range not saving for retirement as well.  Many people, including the so-called wealthy, are not saving enough for retirement.  I see no need to further complicate or provide disincentive to save. 

FYI - Tax deferred accounts are just that, "tax deferred."  You put the money in without paying tax on the front end and pay the taxes when you remove the money.  The cap and other restrictions are simply unneccessary complications to this process.  401k plans are already somewhat complex as they require yearly participation testing and a yearly tax return.  Additional restrictions will further disincentivize employers from providing them (which hurts all employees).

Now, if you want to talk about putting restrictions on whatever Mitt Romney used to accumulate his tax deferred accounts, I'm all ears.  But from what I've heard so far, this isn't it.

Midwest

PS - The non sequitur is the President's plan.  It's nonsense (more class warfare) and it will never materialize.

[gillstone]

Of course the plan would have to pass the House. 

Wait, I'll restate, the Democratic President's plan to raise taxes on high-income earners would have to pass the Republican-controlled House of Representatives.  The same House (give or take the minimal turnover in seats) that scuttled entitlement reform in the 2011 becasue it was linked to a tax increase.

Getting antsy about a budget proposal like this, especially when its not even on the table until late 2015 is just plain silly.  Its the opening to a long round of painful negotiations and posturing on both sides.   

[GlassStash]

"Wealthy" is defined as $183k for an individual or "$225k for a couple.  There are plenty of people in that range not saving for retirement as well.  Many people, including the so-called wealthy, are not saving enough for retirement.  I see no need to further complicate or provide disincentive to save. 

What evidence do you have that people earning in this range are "not saving for retirement"? I have no doubt that they may not be saving at the level expected of a Mustachian, but I highly doubt these people aren't saving for their retirement. Even if this were true, a complication or disincentive would make little difference. What else does the gov't have to do to incentivize person like this to save? $17,500 tax deferred savings per spouse, $5,500 tax deferred or tax free savings per spouse, plus favorable tax laws for capital gains made in taxable. All for people who should have a lot of disposable income to save. If this is not enough incentive for a reasonably intelligent person to save/invest some of their income, I don't know what is.

FYI - Tax deferred accounts are just that, "tax deferred."  You put the money in without paying tax on the front end and pay the taxes when you remove the money.  The cap and other restrictions are simply unneccessary complications to this process.  401k plans are already somewhat complex as they require yearly participation testing and a yearly tax return.  Additional restrictions will further disincentivize employers from providing them (which hurts all employees).

Thank you for explaining the intricacies of tax deferred accounts, I had no idea how they worked . . . The ability to pay taxes on the back end is a God send. 28% or 36% marginal tax rate now OR 15% or less in the future upon withdraw? Tough choice.

It's nonsense (more class warfare) and it will never materialize.

LOL I was waiting for the political rhetoric. Bravo sir.

[matchewed]

So you're going to not invest and sit on dry powder for something that may or may not become law and even if it does it would go into effect in 2015 and have little to no actual effect on actual the performance of most companies in the world? K

You may have an overinflated view as to the actual influence a president has on the economy.

I did not say that. But i also do not think I have an over inflated view of the president view of the Economy. Of course i am not going to stop investing that would be moronic. I just shared a link so I dont think you should assume what you might think are my views and or positions on such link. If and when the talks begin I will find areas i believe to be opportunistic. But to say the Presidents comments cannot move the market one way or another is also Naive.

I apologize I thought -

http://www.marketwatch.com/story/obama-plan-cut-tax-breaks-for-rich-retirement-savers-2014-02-21?dist=beforebell 

Pension plans would most likely be effected as well and since I "play" the market I am sure this will stall and cause a reversal. Have some dry powder in my opinion ready. The talks alone will drive this.

*emphasis mine* had something to do with not investing and having dry powder ready. I may have misinterpreted that. You seem to be clearly stating that you feel this will stall the economy and cause a reversal and that people should have money ready. Sure presidents comments can make a blip in a short term sense but that can burn people just as much as it can profit others. I'm stating it is a zero impact on the economy to detract from the "SCARY LEGISLATION" talk that will inevitably rise from this.

[Midwest]

GlassStache:

To your point 1 - Shouldn't everyone (including higher earners) be encouraged to save?  Beginning professionals often have huge student loans and high salaries and not nearly the disposable income you seem to believe they have.  Reducing the attractiveness of these plans will in fact be a disincentive.

The more distressing complication or disincentive is at the employer level.  While you may or may not believe it, employers drop 401k plans rather frequently because of their complication and lack of benefit to themselves (ie the high earners).   The president himself is proposing the Myra to help with this problem.

Have you considered how the second part (the 205k/$3.1M cap) would be implemented?  Interest rates go up $3.1 goes down?  The complexity is pointless.

To your last point - What else do you call something that increases complexity for $1B in revenue through all these complications?  My comments are not political rhetoric, this is simply a silly plan.  There are much easier ways to raise revenue.

[Undecided]

Personally I am waiting to learn that some guy has a 1 billion dollar ROTH ira (imagine the whatsapp guy  allowing is IRA to buy 100 bucks of founding stock) to see how everyone reacts.

Isn't a tenth of that good enough for whatever reaction will come?
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

[GlassStash]

GlassStache:

To your point 1 - Shouldn't everyone (including higher earners) be encouraged to save?  Beginning professionals often have huge student loans and high salaries and not nearly the disposable income you seem to believe they have.  Reducing the attractiveness of these plans will in fact be a disincentive.

The more distressing complication or disincentive is at the employer level.  While you may or may not believe it, employers drop 401k plans rather frequently because of their complication and lack of benefit to themselves (ie the high earners).   The president himself is proposing the Myra to help with this problem.

Have you considered how the second part (the 205k/$3.1M cap) would be implemented?  Interest rates go up $3.1 goes down?  The complexity is pointless.

To your last point - What else do you call something that increases complexity for $1B in revenue through all these complications?  My comments are not political rhetoric, this is simply a silly plan.  There are much easier ways to raise revenue.

I'm am not against incentives for retirement savings. I merely point out that even with some of the great incentives we have, people still aren't investing. These people, it seems, are impervious to incentives so disincentives won't really change their behavior.

You make a great point about the complication on the part of the employer. +1.

Labeling something "class warfare" is indeed political rhetoric. It is hyperbole meant to influence the minds of the public. If, by "class warfare," you mean this proposal unfairly places yet another burden on high income/wealthy individuals . . . I don't disagree.

I think your ultimate point about better ways to raise revenue is spot on. This proposal is not a great one in my mind, I merely took issue with the brevity of your initial post. My apologies, as it seems I misunderstood it. 

[skyrefuge]

I am sure this will stall and cause a reversal. Have some dry powder in my opinion ready. The talks alone will drive this.

So you've already been holding that "dry powder" for the last 2 years, right? Since you're someone who makes investment decisions based on political information like this, I know you must have been aware that this proposal was originally made in 2012 and re-proposed every year after that. Good thing you aren't one of those foolish low-information amateur market-timers who first heard about this proposal today and thinks it's still actionable!

Anyway, good thing you kept all that money out of the market over the last 2 years, because this is surely the year the proposal will actually be implemented, and the money that you'll be able to make on the ensuing market dip is going to absolutely dwarf the piddly little 37% return you would have gotten if you'd had that money invested over the last 2 years. Your impeccable market-timing insight sure highlights the folly of passive investing! I just wish I had the same access to information (and the guts!) to try this sort of active investing myself. :-(

[Midwest]

Personally I am waiting to learn that some guy has a 1 billion dollar ROTH ira (imagine the whatsapp guy  allowing is IRA to buy 100 bucks of founding stock) to see how everyone reacts.

Isn't a tenth of that good enough for whatever reaction will come?
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

That would be an area they might consider some regulations on.  Their tax advisors are brilliant, but I don't think this was the original intent of the Roth.  The tax/complication ratio might actually make sense in these cases.

[ShortInSeattle]

I'm confused. This plan is supposed to be about helping lower and middle class people save more, but it just looks like a tax increase.

How will taxing and limiting the retirement accounts of the wealthy help the middle class save more?

*brain-plosion*

[Midwest]

Stache - Truce.  The confusion may have come because I typed my initial post while you were posting. 

My initial post was in response to the article, not in response to you.

On the class warfare comment - I could have termed it differently.  But honestly, you have a complex plan that raises very little revenue and hits only those that earn or save.  What's the point other than sticking it to the so-called rich? 

Midwest

[Eric]

No need to panic people.  The markets are up .2% so far today, so they obviously approve of this proposal. 

[soccerluvof4]

I am sure this will stall and cause a reversal. Have some dry powder in my opinion ready. The talks alone will drive this.

So you've already been holding that "dry powder" for the last 2 years, right? Since you're someone who makes investment decisions based on political information like this, I know you must have been aware that this proposal was originally made in 2012 and re-proposed every year after that. Good thing you aren't one of those foolish low-information amateur market-timers who first heard about this proposal today and thinks it's still actionable!

Anyway, good thing you kept all that money out of the market over the last 2 years, because this is surely the year the proposal will actually be implemented, and the money that you'll be able to make on the ensuing market dip is going to absolutely dwarf the piddly little 37% return you would have gotten if you'd had that money invested over the last 2 years. Your impeccable market-timing insight sure highlights the folly of passive investing! I just wish I had the same access to information (and the guts!) to try this sort of active investing myself. :-(

Witty! i will give you that! But thanks for sharing some of what might seem obvious to some with those that might not be so knowledgeable. In any case I always find it interesting when somebody starts or shares a link how so many assumptions are made exspecially when a person doesnt know Jack about someone or what dry poweder might mean to one in terms of true dollars. Have you heard the term generalizations? or open for discussion? good to learn from good ole debates not personal assumptions.

[matchewed]

I am sure this will stall and cause a reversal. Have some dry powder in my opinion ready. The talks alone will drive this.

So you've already been holding that "dry powder" for the last 2 years, right? Since you're someone who makes investment decisions based on political information like this, I know you must have been aware that this proposal was originally made in 2012 and re-proposed every year after that. Good thing you aren't one of those foolish low-information amateur market-timers who first heard about this proposal today and thinks it's still actionable!

Anyway, good thing you kept all that money out of the market over the last 2 years, because this is surely the year the proposal will actually be implemented, and the money that you'll be able to make on the ensuing market dip is going to absolutely dwarf the piddly little 37% return you would have gotten if you'd had that money invested over the last 2 years. Your impeccable market-timing insight sure highlights the folly of passive investing! I just wish I had the same access to information (and the guts!) to try this sort of active investing myself. :-(

Witty! i will give you that! But thanks for sharing some of what might seem obvious to some with those that might not be so knowledgeable. In any case I always find it interesting when somebody starts or shares a link how so many assumptions are made exspecially when a person doesnt know Jack about someone or what dry poweder might mean to one in terms of true dollars. Have you heard the term generalizations? or open for discussion? good to learn from good ole debates not personal assumptions.

Feel free to clarify then. All we can go off of is what you wrote. If you feel that your comments are being taken out of context then correct the context, outside of that I'm not sure how to interpret what you said otherwise. You are distinctly advising people that markets will stall and reverse and to have dry powder (regardless of size of the powder in true dollars it means that money isn't being invested in now and is waiting for an opportunity that may or may not happen) ready. No one has made personal assumptions about you, we're just reading what you've written. Take a breath you're not a martyr here, we're just questioning this advisement you've given as similar to CNBC style of reporting which is done to generate a reaction rather than inform.

[foobar]

I am aware of this happening. The question is when/if it hits the news. Imagine for example we learned that Mitt Romney had a 100 million roth instead of a normal IRA. That might get a enough press.

Personally I think the ROTHs were a bad idea. They came about for budget reasons (i.e. government couldn't give up current tax revenue) Normal ira serve the purpose of saving for retirement.  ROTH serve the purpose of wealth accumulation and  passing down money tax free to future generations. We would have been a lot better off with a savers tax credit for the people who don't get a meaningful deduction. Oh well.

Personally I am waiting to learn that some guy has a 1 billion dollar ROTH ira (imagine the whatsapp guy  allowing is IRA to buy 100 bucks of founding stock) to see how everyone reacts.

Isn't a tenth of that good enough for whatever reaction will come?
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

That would be an area they might consider some regulations on.  Their tax advisors are brilliant, but I don't think this was the original intent of the Roth.  The tax/complication ratio might actually make sense in these cases.

[Midwest]

With regard to the proposed accumulation cap.  Did I miss an exemption or is this proposal retroactive to all tax deferred accounts?

If so, that has some interesting implications.  You put the money in tax deferred with the understanding that you would be subject to certain rules (RMD, 59 1/2, etc.).  Obviously you knew going in that rates could go up down, but otherwise rules were set. 

This proposal, unless I miss something, plans to change that contract pretty substantially.  If you save too much, invest too well, or interest rates go up, you could be forced to take a distribution and pay taxes.  That's a pretty substantial change from the original terms of the "agreement." 

Those types of retroactive changes could have negative effects (if it were implemented) on IRA contributions as savers will no longer trust the agreement they have with the govt. and may choose to forgo or limit their contributions to these types of plans.

[skyrefuge]

I'm confused. This plan is supposed to be about helping lower and middle class people save more

[citation needed]

but it just looks like a tax increase.

Yeah, or tax-deferral-decrease, or deficit-reduction plan (or even a proposal floated for purely political purposes), depending on your perspective. It seems you understand the proposal; your confusion simply stems from an incorrect assumption on your part.

[skyrefuge]

With regard to the proposed accumulation cap.  Did I miss an exemption or is this proposal retroactive to all tax deferred accounts?

No, you didn't miss an exemption, but your assumptions are wrong. Here is a pretty good description of the actual proposal.

In short, the proposal would only limit new tax-deferred contributions, in years when your balance at the beginning of the year was over the limit. It would not require withdrawals. The balance limit is recalculated every year, and is derived from the amount of money needed to purchase an annuity that would provide $210,000 in inflation-adjusted income. So there could be some years where you could continue to contribute, and other years where you could not, based on both the annuity calculation and your investment return. But your already-sheltered balance would be allowed to rise and fall without regard to the balance limit.

[the fixer]

Lots of missing facts on this one. Here's a few:
- The top fifth of households by income account for 72% of retirement savings in these plans.
- The median single, black, and hispanic household has no savings in retirement accounts.

Source: http://www.cbsnews.com/news/study-401k-retirement-plans-failing-most-workers/ Saving for retirement is a universal concern, but the primary vehicle for it is disproportionally benefiting the rich.

It's totally correct that 401k's have successfully incentivized wealthy or high-income earners, including most of us on this forum, to take advantage of a tax break. But it's not encouraging saving at these levels: we'd be saving just as much without access to these deductions, minus the extra taxes.

The article's quote about 401ks being tax-deferred is not entirely accurate. Yes, the government gives up taxing the money coming out if it never goes in, but if you assume the individual invests the money in a taxable account instead, the government would collect dividends and capital gains taxes that it wouldn't otherwise get.

I think there's a lot of potential for reform here, although I sympathize with the concerns that employers will have less incentive to offer these plans if their benefits are reduced. That will require some study.

[Midwest]

Skyrefuge - Thanks for the clarification.  It appears you are correct.

Midwest

[dragoncar]

With regard to the proposed accumulation cap.  Did I miss an exemption or is this proposal retroactive to all tax deferred accounts?

No, you didn't miss an exemption, but your assumptions are wrong. Here is a pretty good description of the actual proposal.

In short, the proposal would only limit new tax-deferred contributions, in years when your balance at the beginning of the year was over the limit. It would not require withdrawals. The balance limit is recalculated every year, and is derived from the amount of money needed to purchase an annuity that would provide $210,000 in inflation-adjusted income. So there could be some years where you could continue to contribute, and other years where you could not, based on both the annuity calculation and your investment return. But your already-sheltered balance would be allowed to rise and fall without regard to the balance limit.

Thanks, that's helpful.  I'd definitely trade unlimited annual contributions for the total value caps outlined in the article (around $3 million)

[Midwest]

Adding to the complexity of this idea, the $3.0M cap is age adjusted according to this article

http://online.barrons.com/article/SB50001424052748704311204578555881264127620.html#articleTabs_article%3D1

Thankfully this won't go anywhere. 

Midwest

[FIPurpose]

Has any budget Obama put forward been passed? If it's something both parties unite on, its voting down an Obama budget.

[gillstone]

Technically speaking, the White House Budget never gets passed.  the Executive Branch has no authority to introduce legislation let alone budget legislation.  The White House "budget" is more a suggestion to party leadership who can then completely disregard it if they so choose.