2013
The President budget calls for a cap on the value of all defined contribution plans. Given that there are already low caps on what can be placed into these plans, this proposal actually caps what an investor earns over a lifetime of saving. In other words a smart (or lucky) investor is penalized.
The Administration’s point of view is that people should not be able to accumulate in these accounts “substantially” more than then what’s “needed” to fund a reasonable retirement. If that position by the government does not scare you, it should. We are now in the world of an administration telling you what is reasonable income for you.
The setting of $205,000 as the maximum needed pension is upsetting because shouldn’t everyone have an equal chance of maintaining ones lifestyle? The $205,000 comes from the IRC limit on pensions from qualified defined benefit pension plans, but when this limit is reached most plans make up the difference with a non-qualified benefit. The President’s pension (by law equal to the salary of cabinet members) is currently $200,700. In order to provide that benefit for life to Mr Obama when he leaves office in 2017 requires a lump sum equivalent of about $3,621,384. Is that more than what is “needed” for his retirement based on eight years of service? Actually it’s not, but it’s more than we are now being told is necessary for every other American. But keep in mind these lump sum amounts vary greatly based on interest rates. The limit is based on retirement at 62, not before. To make this work account balances must be reported to the government each year.
Just to provide a real life example based on the IRS assumptions, if you wanted to buy an annuity giving you $205,000 a year beginning at age 62 and providing a 100% survivor benefit to your wife also age 62, that annuity would cost you not $3,000,000 as assumed, but $3,735,157.
Lets think about this. Tax deferred contributions are already limited, so that’s not the issue. Eventually these accounts are fully taxed as ordinary income and the government already tells you at what age you must start using the money.
Now, if you placed this money not in an IRA, but other investment and it grew at the same rate as your IRA or 401(k), you pay no taxes until you sell and there is no requirement as to when that happens. But when it does, the profit is taxed as a capital gain, not ordinary income. If you earn dividends, they are also taxed at a lower rate, but are taxed as ordinary income in an IRA or 401(k) plan.
Rather than change the fundamental structure of retirement savings, why not just say Americans with an income of $1 million or more are ineligible for such plans period… because these limits do not impact millionaires and billionaires, but upper middle class Americans. When I was managing plans, the highest paid individuals did not even use the 401(k) plan or only to the extent of the company match, not as a tax haven.
Keep in mind that should there be excess money in these accounts, the government grabs a big chunk through estate tax upon death. By the way, there has not been much press explaining that the budget also reneges on the recent estate tax deal and proposes to revert to 2009 levels which would lower the exclusion from the “permanent” $5,000,000 to $3,500,000. Note the budget words below laced with political rhetoric. The people in this White House have no sense of integrity whatsoever.
Here is exactly what the Presidents budget says:
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.
[My note: $9 billion is less than two days of the amount we currently add to the national debt]
Return Estate Tax to 2009 Parameters and Close Estate Tax Loopholes.The Budget returns the estate tax exemption and rates to 2009 levels beginning in 2018. Under 2009 law, only the wealthiest 3 in 1,000 people who die would owe any estate tax. As part of the end-of-year “fiscal cliff” agreement, congressional Republicans insisted on permanently cutting the estate tax below those levels, providing tax cuts averaging $1 million per estate to the very wealthiest Americans. It would also eliminate a number of loopholes that currently allow wealthy individuals to use sophisticated tax planning to reduce their estate tax liability. These proposals would raise $79 billion over 10 years.
[My note: Seventy-nine billion over ten years; that is 14 days of the amount we currently add to the national debt]
There are no real savings for the budget, this is a timing issue; the government always gets its money. What this change is about is playing a budget game over the next ten years and it is about once again riling up the middle class Obama base with the millionaire and billionaire rallying cry.
This strategy sends the wrong message about saving for retirement. Since a cap on contributions already exists in all defined contribution plans, what is the average person going think; what are they going to do to me next? This change will only make people more dependent psychologically on Social Security because of the message it sends.
Millionaires and billionaires; get it
QUINNSCOMMENTARY 