Apr 10th 2013
By Ken Berry
The new budget plan that President Obama will unveil on April 10 includes an unprecedented tax whammy for retirement savers: A new $3 million cap on IRA assets and other tax-preferred retirement accounts. The Obama administration projects that this tax law change would raise $9 billion in revenue over the next decade.
The proposal may be mildly surprising, but it's not shocking. "It's one of the ideas that we need to look at as we need additional revenues," said Representative Sander Levin (D-MI). The issue surfaced last year when it was revealed that Republican presidential candidate Mitt Romney had over $100 million socked away in an IRA at one point, presumably due mainly to his fortuitous investments in Bain Capital.
Currently, there's no limit on the amount a taxpayer can earn inside a tax-sheltered IRA. If you contribute to a traditional IRA, the annual contribution for 2013 is limited to $5,500 (up from $5,000 in 2012), plus you can add another $1,000 if you're age fifty or over. The same limits apply to contributions to Roth IRAs or any combination of traditional and Roth IRAs.
Usually, a taxpayer wouldn't accumulate anywhere near $3 million by contributing annually to an IRA. But self-employed business people, including professionals like physicians and attorneys, may contribute up to $51,000 to a Simplified Pension Plan-IRA (SEP-IRA) for 2013. For these individuals, it's a lot easier to approach or exceed the $3 million mark without extraordinary measures.
Similarly, employees who work for a company with a 401(k) plan can elect to defer up to $17,500 of salary to the plan, plus another $5,500 if age fifty or over. Also, retiring employees often roll over 401(k) assets tax-free into a traditional IRA.
A $3 million cap would be enough to finance annual payouts of $205,000 in retirement. On April 5, the White House released a statement contending that certain wealthy individuals can "save many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving." The implication is that accumulations providing payouts exceeding $205,000 is "unreasonable."
Thus far, we have no details on how the proposed cap would work. The White House hasn't said if the government would tax accumulations above $3 million or prevent retirement savers from contributing to their accounts once they reached the threshold. It's also unclear whether the cap would affect Roth IRAs. Because Roth IRA owners have already been taxed on amounts converted from a traditional IRA, qualified distributions from a Roth in existence at least five years are 100 percent tax-free. If Roth IRAs are exempted from a $3 million cap on IRA and plan assets, it would make this retirement device even more attractive.
Of course, any imposition of a dollar cap on retirement savings is a long way from occurring. Taxpayer advocates and other groups are already lining up to protest the proposed change.