Retirement Accounts are in the Crosshairs Again

What do critics say?

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Retirement accounts are in the tax man’s cross hairs again. This time as a limit on retirement accounts for upper income Americans. Contributions to retirement plans are generally made with pretax dollars, allowing the amount to be removed from the taxpayer’s current taxable income. All retirement plans have contributions limits. The maximum IRA contribution is $5,500 ($6,500 for those over age 50) and 401(k) and 403(b) contributions are $17,500 ($22,500 for those over age 60). Other retirement plans also have limits tied to age and income. The President’s recent budget proposal attempts to limit retirement accounts from a different perspective – the total amount you can accumulate in retirement savings.

The new proposal would limit total retirement savings to $3 million. Once a taxpayer reached this limit, he would no longer be able to defer income in a retirement account. The $3 million limit is the amount needed to buy an annuity with a lifetime income of $205,000 per year. The Employee Benefit Research Institute estimates less than 3% of 401(k) accounts and less than 0.1% of IRAs would be affected.

Critics of the proposal say it could have unintended consequences on employer sponsored plans. Business owners would have no incentive to keep their plans once they reach the maximum. 401(k) plans are costly to administer. The owner’s ability to defer their own income offsets the cost and justifies taking on the expense of operating the plan. Critics fear business owners will drop their retirement plans once they can no longer make contributions. Many employees would lose their company plan, which is often their only form of savings. The proposal is estimated to raise only $9 billion over 10 years.

A proposal to restrict withdrawals from inherited IRAs introduced last year also found its way into the President’s budget proposal. If passed, heirs who inherit an IRA account would be required to distribute the entire amount within five years. They can currently opt to stretch those payments over their life expectancy.

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