President Barack Obama’s fiscal 2014 budget blueprint contains a proposal that would raise $9 billion over ten years by limiting the amount Americans can contribute into tax-advantaged retirement plans.
In making the proposal, the White House said some people have “substantially more than is needed to fund reasonable levels of retirement saving,” The Wall Street Journal
The plan has experts scratching their heads, as the proposal seems at odds with the oft-stated admonition that Americans need to save more because Social Security can’t be counted on to finance one’s retirement.
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“Not only will such a proposal further challenge retirement savings, it will not generate additional revenue,” said Ronald O’Hanley, president of Asset Management and Corporate Services at Fidelity Investments.
O’Hanley, in a speech Wednesday at the U.S. Chamber of Commerce, said slowing savings will cost the government tax revenue since retirees pay taxes when they withdraw money from their accounts, USA Today reported.
Obama’s plan would cap the combined total in tax-advantaged retirement accounts — IRA, 401(k), 403(b) — to the amount that would be able to fund an annuity of $205,000 annually.
At current interest rates, that would allow someone to accumulate about $3 million before being excluded from making additional contributions.
If interest rates rose to more traditional levels, the cap would fall even lower, as the amount needed to fund the annuity could be as little as $2.2 million, according to the Employee Benefits Research Institute. The group estimated that 6 percent of workers currently aged 26-35 could end up hitting the cap.
“The budget offers few details on how the government would enforce this cap across a worker’s various accounts, but you can bet it would be complicated,” The Wall Street Journal said. “Right now the government doesn’t track tax-deferred account balances. Financial firms don’t have to send IRS 1099 forms to investors unless there’s a distribution . . . So the IRS would get new power to impose new burdens on millions of taxpayers.”
“After this proposal, only a fool would pay taxes now to transfer to a ‘tax-free’ Roth IRA that the feds may decide to tax someday.”
Democrats began toying with the $3 million limit for the accounts after news reports surfaced last year saying that Mitt Romney’s IRA was worth as much as $100 million, Forbes reported.
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