2014 Fed budget cap on retirement account balances

[Petunia 100]

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.

But they aren't saying "3 million is enough". They are saying "3 million sheltered from tax is enough".

[bjl584]

But they aren't saying "3 million is enough". They are saying "3 million sheltered from tax is enough".

Yes they are. All the while they have hundreds of millions sheltered from tax, or in off shore accounts, or in trust funds. Sickening.

[Like2Plan]

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.

How did he do that with the maximum contribution limits?

[bjl584]

How did he do that with the maximum contribution limits?

Played options maybe? I'm not sure. It's impressive if nothing else.

[KTP]

I think Mitt Romney contributed some low basis shares of stuff like Domino's Pizza when his firm bought them out. You can put shares in your IRA instead of money as long as the total amount of value of the shares at the time doesn't exceed the IRA contribution limits.

This would work really well with shares that you don't want to sell (because the volume is low and there is no market) but that you know will be eventually worth a lot more because you have insider information on the company. You are not trading on this insider information, so there is nothing illegal..you just move the shares into your IRA then BAM, the stock goes up 6000% when the news hits.

Maybe we could limit that type of activity, but this clause seems to attack anyone who has accumulated $3,000,000 in an IRA.

Once they pass this, then it is pretty easy to "adjust" the cap down to a more reasonable $1,000,000 and capture a lot more money.

Of course all of the money printing recently might not lead to inflation in the future, and $1,000,000 might provide a very good lifestyle. Pigs may fly soon too.

[Petunia 100]

How did he do that with the maximum contribution limits?

He hasn't disclosed, but there has been a great deal of speculation. One theory is he bought company stock of Bain when it was near worthless in his SEP-IRA (the employer plan they had at Bain in lieu of a 401k), then held it as it soared. Later, he rolled his SEP into a traditional IRA.

There was a lot of uproar over this during the campaign.

In my opinion, this is the sort of thing Obama is presently seeking to end.

I do understand the "slippery slope" theory, and agree it has a great deal of merit. Certainly, I would hope any limiting of tax-deferred accounts would be indexed for inflation.

Let's face it, the vast majority of Americans will never have to fret about exceeding 3 million in their tax-deferred accounts.

Limiting tax-deferred accounts is nothing new. Where is the outrage that people can not contribute as much as they please with no limits? We even have rules further reducing the contribution limits for highly compensated employees if not enough lower level workers aren't contributing. We're OK with that, because we don't want the "rich" to benefit too much at the expense of the rank and file.

[Petunia 100]

Yes they are. All the while they have hundreds of millions sheltered from tax, or in off shore accounts, or in trust funds. Sickening.

Yes. And the rule (if passed) would apply to them, too.

[bjl584]

Yes. And the rule (if passed) would apply to them, too.

I commend your optimism, but I have seen too many stories of politicans and wealthy people playing by different sets of rules than the rest of us.

This will end up being more of the same "do as I say not as I do" type of policy if it's passed.

The issue (if you want to call it that) is that wealthy people have resources available to them that the rest of us don't. Mitt Romney probably already has a team of lawyers and CPAs working on a way to get around this as we speak, just in case this is passed.

[scfr]

Imagine this scenario:
Person 1-A & Person 2-A are married.
Person 1-B & Person 2-B are married.

All 4 of these individuals all age 60 who each have $1M in their retirement accounts. No problem, right?

Well, imagine that person 1-A and person 2-B tragically die at age 60 of cancer. Their spouses inherit their IRAs. Now Person 2-A and Person 1-B each have $2M in their retirement accounts. Still no problem, right?

A couple years later Person 2-A and Person 1-B get married. A couple years after that one of them dies, leaving the last surviving spouse with $4M in their retirement account. Suddenly, you go from having 4 people who merely saved a modest amount for retirement to 1 person who the government thinks has "saved too much."
.
Back door estate tax.

P.S. I realize that this scenario is over-simplified because it doesn't take in to account gains or losses. My point is that it is very easy to imagine how some other than the "rich" could end up getting screwed.

[Like2Plan]

I do understand the "slippery slope" theory, and agree it has a great deal of merit. Certainly, I would hope any limiting of tax-deferred accounts would be indexed for inflation.

I totally agree.

Let's face it, the vast majority of Americans will never have to fret about exceeding 3 million in their tax-deferred accounts.

Shouldn't we be encouraging folks to maximize retirement savings? I know I won't reach that number, but I have not been eligible to contribute for my entire working career (401Ks hadn't been invented when I started work. ).

Suppose someone contributes the max each year--how much would they end up with at the end of a 40+ year career?

Say age 22-50 17,500, with a 25% employer match ($4325)
and age 50-65 17,500 + 25% employer match ($4325) plus catch up of 5,500.
Assuming the market is behaving like it supposed to with an average 7% gain over the time. How much would be in the account by age 65? How much would be in the account at age 70.5 (assuming the person was waiting for RMD)?

Bloomberg's calculator says you wouldn't have to contribute the max to reach the 3,000,000 amount by age 65-- it came up with an annual contribution of $12,107.69 (age 22-65) and 7% interest for 3,000,000.

[KTP]

The scariest thing isn't the cap but the changing of the rules of the game after we have started playing.

If they can modify the 401K in this way, what is to stop them from doing other things to benefit the masses, like taxing Roth distributions?

The trick is to sneak this stuff in with a large limit such that most people feel it won't touch them so go back to watching reruns of Judge Judy.

Really makes you feel like a sucker for doing silly stuff like actually paying down your mortgage or saving for retirement outside of social security.

[scfr]

The trick is to sneak this stuff in with a large limit such that most people feel it won't touch them so go back to watching reruns of Judge Judy.

I wish I could say this was "ha-ha funny," but it's just too damn true and therefore pathetically sad.

[Petunia 100]

Imagine this scenario:
Person 1-A & Person 2-A are married.
Person 1-B & Person 2-B are married.

All 4 of these individuals all age 60 who each have $1M in their retirement accounts. No problem, right?

Well, imagine that person 1-A and person 2-B tragically die at age 60 of cancer. Their spouses inherit their IRAs. Now Person 2-A and Person 1-B each have $2M in their retirement accounts. Still no problem, right?

A couple years later Person 2-A and Person 1-B get married. A couple years after that one of them dies, leaving the last surviving spouse with $4M in their retirement account. Suddenly, you go from having 4 people who merely saved a modest amount for retirement to 1 person who the government thinks has "saved too much."
.
Back door estate tax.

P.S. I realize that this scenario is over-simplified because it doesn't take in to account gains or losses. My point is that it is very easy to imagine how some other than the "rich" could end up getting screwed.

Yes, that scenario would be a bummer for the sole remaining person. Of course, it could be avoided by leaving 1 million to the spouse and 1 million to some other beneficiary, such as any children from the first marriage.

And yes, laws do tend to impact people in ways no one seems to foresee when the law is passed.

[Petunia 100]

I totally agree.



Shouldn't we be encouraging folks to maximize retirement savings? I know I won't reach that number, but I have not been eligible to contribute for my entire working career (401Ks hadn't been invented when I started work. ).

Suppose someone contributes the max each year--how much would they end up with at the end of a 40+ year career?

Say age 22-50 17,500, with a 25% employer match ($4325)
and age 50-65 17,500 + 25% employer match ($4325) plus catch up of 5,500.
Assuming the market is behaving like it supposed to with an average 7% gain over the time. How much would be in the account by age 65? How much would be in the account at age 70.5 (assuming the person was waiting for RMD)?

Bloomberg's calculator says you wouldn't have to contribute the max to reach the 3,000,000 amount by age 65-- it came up with an annual contribution of $12,107.69 (age 22-65) and 7% interest for 3,000,000.

According to Excel, such a person would have 5.5 million (and change) at age 65, 7.7 million (and change) at age 70.

I've never heard of a 401k which matches up to 25% of your contribution, irrespective of your salary. I would sure like to work for that company.

[bUU]

I presume by taxing the excess amount by forcing you to take it as a distribution.

Bad assumption, in my opinion. A better assumption is that they'll prevent you from contributing more once you've gone above the limit.

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.

That doesn't sound at all like what they're talking about. They're talking just about limiting the tax deferral as far as I have heard. There are a lot of people who have a vested interest in making it sound worse than it is, and at this point, they know nothing, so don't be deceived by them into thinking the worst. You don't need to be played like that.

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.

I haven't heard anything about indexing, but they really should index this requirement to CPI (probably Chained CPI, given other discussions going on.)

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.

If that's true, the non-partisan CBO will work that out. I doubt it is true. It's impossible to not take a pretty severe hit politically by making a mistake like that, so they tend to check such things before releasing the budget.

There are already contribution limits imposed.

Good point. This is just limiting contributions some more, to keep the taxpayer's money associated with the tax deferral going most so to those who would represent the biggest burden on taxpayers later if they aren't motivated to safe for retirement now.

Think about it, Warren Buffett and Mitt Romney will not be impacted by this measure.

Mitt Romney has has $100 million in IRAs. It was a big campaign issue, actually. Presumably he would be precluded from putting any more in tax deferred.

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."

They're not saying anything of the sort. Folks can continue to save for retirement beyond $3 million. All indications are that this is just about the tax advantage - that aspect of retirement contributions that cost taxpayers money because it reduces current tax revenues.

But they aren't saying "3 million is enough". They are saying "3 million sheltered from tax is enough".

Precisely.

The scariest thing isn't the cap but the changing of the rules of the game after we have started playing.

Until we see the actual wording of the rules, there is no reason to think that anything past-related has changed. For all we know, all that changes are the rules going forward, i.e., future contributions.

If they can modify the 401K in this way, what is to stop them from doing other things to benefit the masses, like taxing Roth distributions?

Every reasonably accurate and honest discussion of Roth accounts I've seen has highlighted the possibility that the earnings could be taxed on distribution. Don't count on anything you don't have a promise, in writing, saying, "This will never change."