US to cap tax advantaged accounts?

[gmaxwell]

Press coverage: http://money.cnn.com/2013/04/10/retirement/obama-retirement-saving/index.html

It seems the only details on this are:

   
Prohibit Individuals from Accumulating Over $3 Million in Tax-Preferred Retirement Accounts

Individual Retirement Accounts
and other tax-preferred savings vehicles are
intended to help middle class families save
for retirement. But 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 for someone retiring
in 2013. This proposal would raise $9
billion over 10 years.

(http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/budget.pdf Page 18)

This could be pretty unfortunate for people around here depending on how it's implemented.  The words "not more than [...] in retirement" suggests to me a possible implementation of forward projecting returns, e.g. saying someone who is 35 ("retirement in 30 years") could have no more than 300k in tax advantaged accounts.  ... I don't really see how they're going to get those kinds of revenues just out of accounts which currently have more than $3m.

I think it might be in our interest to find out whos drafting implementation text for this and let them know that making assumptions about future market returns and making assumptions about retirement ages is bad.

[Tyler]

This would generate $9 billion in government revenue over 10 years. For reference, the government spends $10.5 billion per day.

The only possible benefits for proposing this are to drum up populist political support or to get people comfortable with a cap so retirement savings for everyone can be raided in the future.

[Bill76]

This would generate $9 billion in government revenue over 10 years. For reference, the government spends $10.5 billion per day.

The only possible benefits for proposing this are to drum up populist political support or to get people comfortable with a cap so retirement savings for everyone can be raided in the future.

I'm pretty sure you nailed it.  Cyprus style direct confiscation is in our future, as soon as the QE and ZIRP games completely fall apart.  Thankfully, I don't have anywhere near $3 million saved up yet.

[Reepekg]

I'm not even sure this is possible? With a quick calculation, I estimated you'd need 13% annual returns on the $5500 IRA and $17,500 401(k) full yearly contributions every year for 40 years to reach $3M.  This assumes approximate matching between increases in contribution limits and the stated cap.

We should all be so lucky (and determined savers).

[Another Reader]

This is called the "Mitt Romney retirement account cap."  Supposedly, some Bain Capital company created shares at low value and distributed them to the Bain executives' tax deferred accounts.  The shares were used to buy leveraged investments that returned many times the value of the shares when they were sold.  Large amounts of money ended up in tax deferred accounts. 

The more insidious provision of the proposal is to force non-spouse inheritors of IRA's to withdraw (RMD's) over 5 years instead of their anticipated life.  Imagine your tax rate if you inherit a $1MM IRA.  Your minimum income is $200,000 for 5 years.  A large portion of that money mom and dad worked so hard to accumulate will end up in the hands of the federal and state governments via the income tax.  If it was already taxed at the newly proposed 45 percent of an estate over $3.5MM, very little is left for the heirs.

We are entering an era where governments are confiscatory.  At the rate we are going, every minute detail of your life will be determined by government fiat, for which you will pay dearly.

[DK]

I haven't heard the specifics, but from what I"ve heard at the high level, I'm scared...I started sacrificing when I was young to save in my roth ira and 401k, and now I will be penalized by compound interest. :-\

[Crash87]

I'm not even sure this is possible? With a quick calculation, I estimated you'd need 13% annual returns on the $5500 IRA and $17,500 401(k) full yearly contributions every year for 40 years to reach $3M.  This assumes approximate matching between increases in contribution limits and the stated cap.

We should all be so lucky (and determined savers).

That was my first thought. I doubt very many people would be affected. I know I certainly won't.

[GreenGuava]

Come on people;  scare tactics are scare tactics.  Do you really think Obama (or whoever, whether now or in the future) is trying to come after the level of retirement funds folks like us put away?

First, there's not a chance in Hell it's going to affect any of us, even if it passes as written.

Second, the "slippery slope" is bullshit, and most of you should know it.  Among other things, capping these accounts at a point where even advanced savers are going to hit is going to be politically impossible.   It's not like it's going to start at $3 million and, all of a sudden, it drops to $50,000.  For those Americans that do save for retirement, 401(k)s and IRAs are the most common way.

Third, you know who is going to get hurt by this the most if it expands into many people's accounts?  The investment industry - companies like American Funds (Capital Group) and Edward Jones, who have so much of their assets under management from people's IRAs.  They have plenty of resources and lobbying influence.  I can't believe I'm about to type these words:  Edward Jones is going to save you money (but on a side note, stay away from their products just the same).

Comparisons to Cyprus or Zimbabwe are, at best, inane.

[Paul der Krake]

Oh come on, Cyprus is an island of one million people, and most the money "confiscated" came from foreign investors. US deposits are far more domestic in nature and a sizeable fraction of depositors will happily grab their shotguns to defend their dollars. Apples and oranges.

Plus, it seems like every single bill passed in this country comes with grandfather clauses.

Not worried.

[AdrianM]

The Australian government has been slowly taking more and more money from our retirement accounts.

Their latest move is to tax what was before tax free retirement money, on any retirement account that earns more than $100,000 a year there is now a 15% tax.
So the money is taxed on the way in and they way out.

If you think that this is a one off then you are mistaken.
Fist they took foreign workers retirement accounts.
Then they too lost retirement accounts.
Then they increased the limit for lost retirement accounts.
Now they are taking more money and are getting bolder.

Do you see a pattern. 

[MooreBonds]

Come on people;  scare tactics are scare tactics.  Do you really think Obama (or whoever, whether now or in the future) is trying to come after the level of retirement funds folks like us put away?

First, there's not a chance in Hell it's going to affect any of us, even if it passes as written.

Second, the "slippery slope" is bullshit, and most of you should know it.  Among other things, capping these accounts at a point where even advanced savers are going to hit is going to be politically impossible.   It's not like it's going to start at $3 million and, all of a sudden, it drops to $50,000.  For those Americans that do save for retirement, 401(k)s and IRAs are the most common way.

Do you realize that when the AMT was first passed in 1969, it was solely intended to hit....wait for it....155 families.

Not 155 thousand families. Not 15 thousand people.

155 families.
(http://en.wikipedia.org/wiki/Alternative_Minimum_Tax)

Of course, any argument that the AMT would be a 'slippery slope' was just utter and pure BS nonesense! Why would anyone back in 1970 worry about the AMT? It was for the ultra rich! It would NEVER hit the middle class. The 4,500,000 taxpayers that were hit with the AMT last year must have all been in the top 0.5% and could afford to pay extra taxes.
[end sarcastic rant]

The other thing to note about this proposal is that their number they used ($3MM) was arrived at by using an assumption that an annual fixed annuity of about $205,000/year is "more than enough" for someone to live on, and the gov't decides that you don't 'need' any more than that...and such an annuity would currently cost $3MM. Therefore, they don't need more than that in their retirement account.

Funny thing is, when interest rates rise, that $205,000/year annuity will cost a LOT less than $3MM. So, presumably, the 'cap' on your retirement accounts will also drop like a stone quite a bit. And that $3MM cap suddenly becomes - what, $2MM? $1.5MM? Hell, if/when 30 year Treasuries run back up to 8% (which isn't that high in a historical perspective), I'd hate to think of what the cap would be...

[gmaxwell]

I certainly didn't mean to spread a bunch of FUD... there appears to be basically no information on how this will be implemented. Some implementations wouldn't be problematic (other than via a slippery slope), like just not allowing any more contributions when you were over some threshold. Some implementations would be— like applying a cap that goes up based on assuming some particular rate of return until you are 65.

Between unusually good growth (after all, the stock market can make 20% swings), and employer contributions (as well as profit sharing) it's possible to stash away considerably more than 17500+5500...  I think you can currently put away as much as 56500 without any age based boosts if you are self employed and have enough income to pull it off. E.g. hitting 3m with 22 years of working at that level and 7.1% returns. ... though yea, I can't feel too much concern about being able to only shelter 3m. My concern is more related to possible implementations which assume a particular longer accumulation time.

[Hamster]

I think this idea makes perfect sense.

The reason that retirement plans are tax advantaged (i.e. government-subsidized compared to income that is spent/invested elsewhere) is to encourage people to save to meet their needs in retirement. There is no reason that the government should subsidize people's retirement saving beyond a point that allows them to meet their needs and provide a reasonable cushion.

You can argue what that number should be, but I think that enough to purchase an annuity that will pay you 4x the median household income every year until you die is a more than reasonable amount. There is nobody saying you can't save more, just that the government shouldn't subsidize it by providing tax advantages for that savings.

Funny thing is, when interest rates rise, that $205,000/year annuity will cost a LOT less than $3MM. So, presumably, the 'cap' on your retirement accounts will also drop like a stone quite a bit. And that $3MM cap suddenly becomes - what, $2MM? $1.5MM?

1.5 MM to get $205k annual disbursements til I die? That's 14% return on investment. Sign me up!!!!

[Reepekg]

Um... the government could just stop gifting you tax-free retirement savings altogether. Everyone just pays their regular taxes.

This is like complaining that you just didn't get enough birthday cake.