2014 Fed budget cap on retirement account balances

[parafly]

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

If the proposal passes, it appears that there would be a forced distribution every year on amounts over $3 million.

http://money.cnn.com/2013/04/10/retirement/obama-retirement-saving/index.html?iid=EL

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.

[Petunia 100]

So no penalty, no confiscation, just remove the amount which exceeds the limit and pay the tax.


This proposal does not surprise me. We have a deficit and a lot of debt. Those tax dollars have to come from someplace.

[scfr]

So no penalty, no confiscation, just remove the amount which exceeds the limit and pay the tax.

Try telling it to someone who is still working and would be pushed from a 25% marginal tax bracket to a 39.6% marginal tax bracket due to a forced withdrawal.

It will be interesting to see how many Americans decide to abandon the Titanic (move overseas) if the proposal passes.

[Petunia 100]

Try telling it to someone who is still working and would be pushed from a 25% marginal tax bracket to a 39.6% marginal tax bracket due to a forced withdrawal.

Oh, it will be a real bummer for those who have to do it. I am not disputing that at all.

[Like2Plan]

Petunia 100

Getting back to the

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.

You would know this better than I, but some of the retirement calculators that I have looked at suggest that a person would have a real good chance at meeting retirement goals by saving somewhere between 15-20% of income. Given the example above ($12,107 annual contribution), that would equate to 20% savings rate with an income of 60,540 and 15% savings rate with an income of 80,720.

So, this limit wouldn't only be impacting the ultra rich guys. It is bizarre to put the cap so low that it could be exceeding by diligent saving and earning a reasonable rate of return (7%).

[Like2Plan]

I was thinking about another aspect in this complicated issue. I think it would be safe to say 401Ks are more common than pensions for retirement these days.
Back in the day that pensions were more common, your pension contribution was typically a percentage of your income. The employer typically matched your contribution (and also took on all the risk for delivering the defined benefit). The benefit was pretty straight forward--you work X number of years, contribute X % and when you retire you receive X amount.
Now, that whole landscape has changed. What happens to the employer match when the cap is reached and the employee can't make any further contributions into the 401K? It puts the employee further behind in retirement savings.

[Petunia 100]

Petunia 100

Getting back to the

You would know this better than I, but some of the retirement calculators that I have looked at suggest that a person would have a real good chance at meeting retirement goals by saving somewhere between 15-20% of income. Given the example above ($12,107 annual contribution), that would equate to 20% savings rate with an income of 60,540 and 15% savings rate with an income of 80,720.

So, this limit wouldn't only be impacting the ultra rich guys. It is bizarre to put the cap so low that it could be exceeding by diligent saving and earning a reasonable rate of return (7%).

No, it would not impact only the ultra rich.

If such a law were to pass, diligent savers would change their planning. You would not want to aim past 3 million in tax-deferred. You would probably aim for say 2.5 million and do more taxable investing. You would perhaps not want to contribute the max, so you would not wind up in the position of not contributing at all and passing on any employer match. You might choose not to contribute at all if you had some low income years, and save the space for years when your income was higher. If your account balance was growing rapidly, you might shift to more bonds and cash to slow the growth, and load up on stocks in taxable accounts.

Tax planning would become more complicated for the middle class. So perhaps the accountants are really behind this.

[KTP]

I still want to know where in the budget is a cap on public pensions. There are several retired public servants who draw more than $200,000 a year in a COLA'd pension plus they get health benefits.

$3,000,000 will not buy you a COLA'd annuity that pays $200K plus your healthcare.

To be fair, we need to also cap pensions to the amount that whatever COLA'd annuity the $3,000,000 401K cap would buy.

try getting this past the unions...good luck with that.

[bUU]

If the proposal passes, it appears that there would be a forced distribution every year on amounts over $3 million.

I bet you that it won't end up starting out that way. There will either be a five year period during which you'll be able to declare the distributions (so you can do some tax planning for minimizing the taxes you pay, just like in retirement), or perhaps even a grandfathering of the specific balance that you started out with. There isn't even a bill to review right now, so there is no way to know what the actual details will end up being, once folks actually sit down and start working on this.

It will be interesting to see how many Americans decide to abandon the Titanic (move overseas) if the proposal passes.

This kind of exhortation is silly, at best - a pretty puerile tactic to try to spread some FUD regarding something you don't like.

$3,000,000 will not buy you a COLA'd annuity that pays $200K plus your healthcare.

I priced out an annuity and it came to about $175K for $3M. If you're at the point where $175K per year isn't enough for you, then I'll be happy with the government not giving you any further tax advantages for pushing that number higher. That's more than fifteen times the federal poverty limit, more than triple median income. If you're inclined to save that much, great - more power to you - but not more tax deferral.

[KTP]

I priced out an annuity and it came to about $175K for $3M. If you're at the point where $175K per year isn't enough for you, then I'll be happy with the government not giving you any further tax advantages for pushing that number higher. That's more than fifteen times the federal poverty limit, more than triple median income. If you're inclined to save that much, great - more power to you - but not more tax deferral.

Is that a COLA'd annuity or a fixed annuity? Does it pay for medical costs too?

Why do you not address the need to curb pensions which would also save the government money?

[bUU]

Is that a COLA'd annuity or a fixed annuity? Does it pay for medical costs too?

Nope, it doesn't need to. The specifications of the annuity are secondary to the fact that it is a lot of money, more than most people will ever have to "worry" about. It's a fair amount, and we can quibble about whether it should be $3M or $3.2M or $2.8M or $4.5M, but all of these numbers are way past the point where the taxpayer really needs to be furnishing the saver with an incentive to save through tax advantages. Folks who want to save more are to be congratulated and admired, and should have no problem finding a brokerage willing to foster their further saving for retirement in taxable accounts.

Why do you not address the need to curb pensions which would also save the government money?

I tend to reply onto to comments I have something of especial value to contribute to. I don't think people need posters posting valueless replies like, "Hmmm..." or "Uh huh."

[KTP]

Nope, it doesn't need to. The specifications of the annuity are secondary to the fact that it is a lot of money, more than most people will ever have to "worry" about. It's a fair amount, and we can quibble about whether it should be $3M or $3.2M or $2.8M or $4.5M, but all of these numbers are way past the point where the taxpayer really needs to be furnishing the saver with an incentive to save through tax advantages. Folks who want to save more are to be congratulated and admired, and should have no problem finding a brokerage willing to foster their further saving for retirement in taxable accounts.

I tend to reply onto to comments I have something of especial value to contribute to. I don't think people need posters posting valueless replies like, "Hmmm..." or "Uh huh."

Ok, got it. So you go along party lines and won't talk about pension reform because those in power that you support will not talk about it.

$150,000 cap on pension would be more than enough money for anyone and the taxpayers should not be furnishing people with more than this. Perhaps Obama will bring up pension reform next week.

[bUU]

Ok, got it. So you go along party lines and won't talk about pension reform because those in power that you support will not talk about it.

Dude, why are you so abusively defensive? Why do you immediately assume someone disagrees with you because they don't say anything?

$150,000 cap on pension would be more than enough money for anyone and the taxpayers should not be furnishing people with more than this.

If you're talking "per year" then I agree with you. Did that stroke your ego enough to calm you down?

[KTP]

You can't discuss 401K plans without at least bringing up pensions, because the 401K was designed to largely replace pensions in an effort to put all of the risk on the employee. It was a bum deal, but workers had little choice.

If they now want to change the rules yet again on 401K and not address the other retirement vehicles then you might as well just post uh-huh or hmmm. Those responses at least add something to the conversation.

[bUU]

You can't discuss 401K plans without at least bringing up pensions, because the 401K was designed to largely replace pensions in an effort to put all of the risk on the employee. It was a bum deal, but workers had little choice.

If they now want to change the rules yet again on 401K and not address the other retirement vehicles then you might as well just post uh-huh or hmmm. Those responses at least add something to the conversation.

Gosh you must be so incredibly insecure about your own perspectives if you feel that your own comments, not contradicted by others, were inadequate to cover the matter of pensions. It seems like you're just falling over yourself trying to come up with rationalizations for trying to play "god of the thread", dictating what will and what won't be discussed, and on what terms you will deign to consider comments made by others worthy. Get over yourself. Have your say, and let others have their say. How about we stop talking about the discussion and go back to just talking about the topic?