2014 Fed budget cap on retirement account balances

[EEinNJ]

The proposed Obama administration budget calls for a cap in retirement account balances. It's on page 18, quoted below. Doesn't say what will happen to the money in excess- perhaps just tax/confiscate it? I know that $3m seems like a lot of money, but as the joke goes, a million bucks ain't what it used to be. It won't be too many years before someone's million dollar portfolio they need to last 20+ years, growing to keep up with inflation will be caught by this.

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 accu
-
mulate many millions of dollars in these ac
-
counts, 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 retire
-
ment, or about $3 million for someone retir
-
ing in 2013. This proposal would raise $9
billion over 10 years.

[KTP]

I assume that somewhere in the budget there is a cap on public and private sector pensions also? A $200,000 cap (yes there are public city officials that have pensions larger than this per year).

401K is already a shaft compared to pensions...why do they want to attack it more?

[Petunia 100]

I don't know why so many people are assuming this means they will confiscate your money. How I read it is, once you hit 3 million, you are no longer eligible to contribute to tax-advantaged accounts.

[KTP]

I am against this type of rob from the rich give to the poor even though we will never hit 3 million in our retirement accounts.

AMT was designed to only hit very rich people when it started, but now if they didn't patch it each year, it would hit people that don't consider themselves remotely rich. The same thing might happen here with inflation...or they could lower the cap down to 2 million or 1 million when they run out of the richer people's money.

[bUU]

I don't know why so many people are assuming this means they will confiscate your money.

Truly. Yet another proposal that has consistently been vacuously distorted by opposing partisans to cynically try to deceive the public into thinking it is a proposal for something it is not.

How I read it is, once you hit 3 million, you are no longer eligible to contribute to tax-advantaged accounts.

Indeed.

I am against this type of rob from the rich give to the poor

Good thing that this proposal is no such thing.

AMT was designed to only hit very rich people when it started, but now if they didn't patch it each year, it would hit people that don't consider themselves remotely rich.

I'm in favor of indexing this threshold to CPI.

[EEinNJ]

What I posted was quoted directly from the Budget proposal. Not someone's partisan spin on it. It doesn't say anything about being ineligible for contributions once you have $3 million. It says you CAN'T HAVE MORE THAN $3 million in all your tax deferred accounts, and they expect to raise 9 billion by imposing this limit. I presume by taxing the excess amount by forcing you to take it as a distribution.

[SeanH]

I suspect 401ks are an easy target because most people aren't adequately funding them. You've seen the occasional headlines - this "percentage of people"(large) have less than "x amount of dollars" (small) in their 401k at retirement. A rough excel calculation appears to indicate that 30 years of $17,000 contributions returning 8% comes out to approximately $2 million. I doubt this is the last we'll hear of this topic.

[KTP]

401K was designed to replace a pension, and place the burden on the worker and not the company.

Now they want to change the rules and take away 401k money after having taken away pensions from those who only had 401k as an option.

The problem is there are no big unions supporting 401k....we are on our own...so of course we will be targeted and screwed over.

[Petunia 100]

What I posted was quoted directly from the Budget proposal. Not someone's partisan spin on it. It doesn't say anything about being ineligible for contributions once you have $3 million. It says you CAN'T HAVE MORE THAN $3 million in all your tax deferred accounts, and they expect to raise 9 billion by imposing this limit. I presume by taxing the excess amount by forcing you to take it as a distribution.

Forcing you to take a distribution is not the same thing as confiscating your money.

[KTP]

Forcing you to take a distribution is not the same thing as confiscating your money.

yes it is.

If we get high inflation and a return to higher interest rates, the balances of the 401k will grow due to higher bond and stock returns. If you force a distribution of this money during the earning years, it means there will be a very heavy tax (35% or more). The price of an annuity will be higher and you may not be able to purchase something that is equal to a COLA'd pension.

[Like2Plan]

This proposal seems disingenuous to me. It sounds like it comes under the heading of getting the "rich guy" so it will garner a certain popular appeal, but I don't believe the rich guys are putting vast amounts of their wealth into their 401K. There are already contribution limits imposed. Think about it, Warren Buffett and Mitt Romney will not be impacted by this measure. (For that matter, they don't seem to be impacted by AMT. ) It would be silly for them to invest in pretax contributions that would be taxed as ordinary income when they take it out when they could get much more favorable tax treatment from dividend income, long term capital gains and municipal bonds.

Who do I think it impact the most? Folks who have been consistantly been saving over time and who have had some pretty successful investments. It is possible that the majority of their savings are in a tax advantaged accounts. There is already a RMD for 401Ks and regular IRAs--this sounds like there will be another layer of complexity added on where you have to take amounts over the max out of the account and in the case of pretaxed contributions it gets taxed--maybe not with the most favorable timing.

[bjl584]

I find the whole concept of this sickening.

It's maddening that politicians that have net worths of tens or even hundreds of millions of dollars can dictate to me that $3 million is "enough."

I doubt this is going to pass in the final budget. Thankfully it is just a proposal.

[parafly]

I need more clarity on the exact ramifications of this proposal.

I hate the idea of forcing a distribution from tax deferred accounts after the account balance reaches $3 million. I'm okay with not allowing additional contributions to accounts with a balance of $3 million or more.

Just because you can't contribute to tax deferred accounts past $3 million, doesn't mean you can't continue to save for retirement. It's a reasonable proposition that at some point the tax deferment incentive is taken away.

[Petunia 100]

yes it is.

If we get high inflation and a return to higher interest rates, the balances of the 401k will grow due to higher bond and stock returns. If you force a distribution of this money during the earning years, it means there will be a very heavy tax (35% or more). The price of an annuity will be higher and you may not be able to purchase something that is equal to a COLA'd pension.

If we had the ability to let our tax-deferred accounts stay intact and grow forever, this argument would have some merit. But, we don't have that ability. Tax-deferred accounts already have Required Minimum Distributions (RMDs).

The tax bracket argument is moot, because when you have a 3 million + account, your RMDs are already in a high bracket.

[Petunia 100]

This proposal seems disingenuous to me. It sounds like it comes under the heading of getting the "rich guy" so it will garner a certain popular appeal, but I don't believe the rich guys are putting vast amounts of their wealth into their 401K. There are already contribution limits imposed. Think about it, Warren Buffett and Mitt Romney will not be impacted by this measure. (For that matter, they don't seem to be impacted by AMT. ) It would be silly for them to invest in pretax contributions that would be taxed as ordinary income when they take it out when they could get much more favorable tax treatment from dividend income, long term capital gains and municipal bonds.

Who do I think it impact the most? Folks who have been consistantly been saving over time and who have had some pretty successful investments. It is possible that the majority of their savings are in a tax advantaged accounts. There is already a RMD for 401Ks and regular IRAs--this sounds like there will be another layer of complexity added on where you have to take amounts over the max out of the account and in the case of pretaxed contributions it gets taxed--maybe not with the most favorable timing.

Mitt Romney has 100 million + in his traditional IRA. So yes, he certainly will be impacted by this measure. Pulling out 97 million + in a single year will certainly have some impact on his tax bill.