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Retirement Account IRA Cap Proposal in Obama Budget

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Nest EggThere were two major headlines (so far!) from President Obama’s budget proposal – using Chained CPI for Social Security and a cap on retirement accounts. Many places have cited the cap as a $3 million cap but in reality it’s a calculation. The limit is based on how much you could get from your retirement account if you converted it to an annuity. An annuity, if you recall, is basically a series of payments, typically annually. A pension is a type of annuity.

Right now, as far as I know, there isn’t a cap on retirement accounts (Mitt Romney disclosed he had an IRA with over $100 million). Your cap is essentially on the front end, how much you can contribute, and business owners, including self-employed individuals, have different limits than employees.

For example, as an employee, you can contribute up to $17,500 to a 401(k) this year. As a business owner, I can contribute that amount as an employee but I can also contribute up to $51,000 a year as an employer (the limit is 25% of my compensation). So you only hit the current limit if your business generates in the hundreds of thousands of dollars. Granted, not many business owners are in this category (and most articles don’t talk about how the employer limit is 25% of compensation, not anything up to $51,000), but you have enough high profile names to make this a convenient target.

The argument is that you don’t need a retirement account of that size and they estimate it would generate $9 billion in revenue over the next decade. Presumably, this would come from taxation of income that savers wouldn’t be able to defer into a retirement account. I suspect this will not affect many folks (and let’s face it, $9 billion over ten years is nothing in an annual budget of $3.5 trillion) but the proposal didn’t go into the details of how this would work – just floated the idea of it.

Unlike the use of Chained CPI for Social Security, this one has the feel of a red herring. Using a smaller inflation figure to calculate government payments will have a real noticeable impact on people. Capping IRA accounts? Doubtful. Average retirement savings is so low that $3 million looks laughable.

(Photo: robstephaustralia)

{ 7 comments, please add your thoughts now! }

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7 Responses to “Retirement Account IRA Cap Proposal in Obama Budget”

  1. Chuck says:

    The same was probably said about the income tax when it was 1% and only applied to the richest of the rich. That’s how they always do it.

  2. Your last sentence nailed it: so few people have saved so little. THAT’S the real problem.

    Sounds to me the Gummint would do much better by taxing people who had LESS than, say, $300,000 in their IRA’s by the time they reached 60. Now that would light a firecracker under the nation’s collective behinds to get to that number, wouldn’t it?

    But the world would stop turning when we mention smart and government in the same sentence, wouldn’t it?

  3. $3 million in retirement when we’re approaching retirement in 30 years would yield $51,000 per year in today’s money.

    If you are retiring in 10 years or more and you won’t have $1 mil or more saved up, you’re in big, big trouble. The fact that most Americans aren’t doing what they should doesn’t mean that those who are should be punished.

    It’s absurd that whether the government thinks you have “enough” is the basis for changing the rules. You can tell me that it’ll be “fixed” over time and the number will grow with inflation….and I’ll say, “Oh, yeah? Like the AMT, hmmm?” Because that’s TOTALLY only taxing the mega-wealthy, right?

  4. Ron says:

    Wow, to be able to save 25% of my income, up to $51,000, in an IRA. That would be great. I would also like to be able to do an annual roll out from my high cost 401(k) into a low cost IRA.
    Please level the playing field and allow all citizens to save within the same limits and allow them to control their investment cost and choices. I don’t expect Congress will allow all of us because of the government’s loss of revenue.

  5. I think anything the government touches turns to garbage. The more they regulate, the worse it gets.

  6. admiral58 says:

    i think its a terrible idea

  7. NateUVM says:

    The tax deduction is an incentive to save for retirement. If you have $3million socked away…you’ve saved for retirement. No further incentive needed.

    If balancing the budget is a priority, this is a common sense measure toward that goal.

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