President Barack Obama is about to unveil his budget proposal, and parts of his proposal have already made their way into the news. One of the aspects of his new budget is that he wants to prohibit anyone from saving more than $3,000,000 in an IRA.
The White House issued a statement regarding this new proposal:
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.
How dare anyone try to save more than a “reasonable” amount of money for retirement!? The nerve of some people!
The proposal hasn’t been released yet so the details aren’t clear. What is clear is that the government is desperate for additional ways to tax the American people, and they have finally started turning towards retirement accounts.
Be Afraid of a “reasonable level of retirement saving”
A few months ago I posed a question: Is your 401k safe from the government?
I explained that part of the reason I took a loan from my 401k to buy a house is because I don’t trust the government to keep their hands off my retirement accounts.
While some people agreed with me, others suggested it was unlikely at best. Still others worried about my own mental health. A few of the responses included:
“I don’t see something like this ever happening in our lifetime unless the country was taken over or there was some global crisis like nuclear war or something like that.”
“After… telling us that the sky is falling and our retirement accounts will ultimately belong to someone else, I like a previous reader will bow out and refrain from visiting this blog.”
“I think you’re getting a little close to the edge, Kevin. Please don’t fall off!”
In November I was crazy for thinking the US government would go after private retirement accounts. Less than six months later we are already seeing proposals surface.
It worries me (and it should worry you too) that the government feels it has a right to determine “reasonable levels of retirement saving.”
Today it’s a $3 million cap on IRAs. But if that passes, why not $2 million? It still sounds like anyone with $2 million in an IRA is super rich. Then why not $1 million? Or $500,000?
And why stop with IRAs? People shouldn’t have $3 million in a 401k either. That’s not “reasonable”. Let’s cut that to $1 million or $500,000 too.
Why should some people get to retire with millions in the bank while others have to work part time jobs until the day they die? That’s just not REASONABLE!
If the knuckleheads in Washington think they know a reasonable budget for an individual or family, maybe they should look at how messed up their own budget is and realize they should back off!
Make Your Voice Heard
If you think it is reasonable for someone to reap the benefits of working their ass off and saving money, then you’re going to have to make your voice heard.
People who spend every dime they make as soon as it hits their pocket don’t deserve the same retirement as someone who chooses to save as much as possible. That’s not reasonable at all.
If this (or any other legislation to limit retirement savings) ever makes it to the floor of Congress, make sure to contact your Senator or your Representative and let them know that responsible financial planning deserves to be rewarded.
If you’d like to read more about how the proposed law might impact your personal finances, check out this great article at Seeking Alpha.
Readers: Does this proposal and/or White House statement change your attitude towards retirement accounts?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
Doesn’t really change my attitude towards retirement accounts as I’m not even close to the limit, but sure does change my attitude towards Washington.
The problem is that Washington can change laws regarding retirement accounts at any time. When you put money in an IRA or 401k, you have to trust that the government will maintain reasonable laws from today until the day you retire.
Do you trust the government over the next 40 years (or however long until you retire)? I don’t.
Folks thought I was just being paranoid when I started warning that the government is thinking abut confiscating your retirement accounts. This isn’t just something that happens in far-away places like Cyprus.
“For your protection” you will soon be required to keep some, if not all, of your retirement accounts in “government-backed” securities. This is not something I just dreamed up, it’s already in the works. Once that happens, you can kiss your retirement accounts goodbye.
As for “national emergencies,” Dear Leader is working on one right now — North Korea. I predict that the “national emergency” will come a month or two before the next presidential election. At that point, your IRA and 401(k) accounts won’t be the only things you will kiss goodbye.
I think you have the right idea. When the government needs money but they don’t want to “steal” it, they will just force individuals to give them a “loan” in their retirement accounts. It will all come under the guise of “the stock market is too risky, government bonds are safer. This is for your own good. We know better how to manage your money than you do.”
This is why I am no longer contributing to my IRA.
Kevin,
If I may ask, what vehicle are you using to save for your retirement?
Thanks
Yep, that’s all you had to say… Cyprus!
Let’s just say that nothing is impossible, considering that they already have thought about taking your savings: http://www.washingtonsblog.com/2013/03/it-can-happen-here-the-bank-confiscation-scheme-for-us-and-uk-depositors.html
That’s an interesting read. The situation in Cyprus should make everyone think long and hard about whether or not to keep large sums of money in the bank.
I have to agree with your title. Once you become rich or financially independent, you gain power at the government’s expense!
Time to figure out more loopholes if this bill passes!
Here’s a loophole: become a senator and get on the government pension. You’ll never have to worry about money again in your life.
Calm down, Kevin. A proposal is just a proposal, and will be debated and possibly defeated. That’s why we have a government with checks and balances, as well as a 2-party system. Do you honestly think this proposal will pass the GOP-controlled House, determined to oppose anything Obama comes up with, even things they’ve historically agreed with?
Now I know how you love to froth at the mouth at the evils of government, whether real or imagined, but let’s see what the proposal actually says.
The proposal goes after “:tax- favored retirement accounts of some private-equity executives and self-employed professionals. Self-employed business owners, such as doctors and lawyers, can contribute up to $51,000 a year to their IRAs.” This isn’t you, Kevin. You can contribute $5000 a year.
Also: “You could put as much as you want in your Wells Fargo (WFC) savings account or other accounts. It’s just the tax-favored retirement accounts that are being scrutinized here.” So this statement of yours – “Why should some people get to retire with millions in the bank” – is already off course. Even Seeking Alpha gets this: “More specifically, it is not $3 million in assets that President Obama’s proposal would specifically ban, but rather, the amount of money that a retirement account could produce.”
So don’t worry, Kev. Put $20 million in cash, or in taxable accounts at favored long-term capital gains rates, and they won’t steal you blind. Don’t fall off the cliff, now.
I thought I made it pretty clear that this particular proposal is not going to destroy retirement accounts.
The concern is that the government has clearly stated that they think they have a responsibility to determine reasonable levels of retirement savings and impose that upon the people. It’s not this proposal that worries me, but what might happen in the future.
As you read in that Seeking Alpha article, the AMT started out targeting 155 individuals. Now it hits many middle class families. It may just be a matter of time before inflation hits and this $3 million barrier is impacting large numbers of people.
“I thought I made it pretty clear that this particular proposal is not going to destroy retirement accounts.”
No, actually you didn’t. Look at your own title and the accompanying picture, both alarmist.
The AMT is a separate issue. It was never indexed for inflation, and consequently is hitting numerous people it was never intended to affect.
What happens in the future is unknown, good or ill.
I have to say that Larry has a point. The original article points has some good info on the bill up for debate, but the article veered a little into alarmist territory (with a little “I told you so!” thrown in).
I think you could have made your point Kev a little simpler, and then also presented us with a little more info perhaps (e.g. how this affects only tax favored accounts, what other options you have for retirement savings, timetable on the introduction of the bill etc).
Just one man’s feeling expressed in an internet comment, and we all know what that is worth, right! Thanks for bringing my attention to this regardless.
Thank you!
I would be very curious to find out why they decided on a limit. When you withdraw money from an IRA, you are taxed as ordinary income. I would think a limit may be appropriate for a Roth IRA since it is tax free.
Saving 3mil of Gov money is a little extreme while Washington is searching for money to fund programs instead of cutting. One could save money with investments and in other areas’ vs. saving gov money. 3mil is more than enough to retire with so why keep taking from money needed?
I’m definitely against this proposal, however given the existing cap on how much you can place in an IRA each year, how can the value of an IRA significantly exceed $3,000,000? Am I missing something? Is the assumption that interest rates will be higher to cause this?
Self employed people can contribute much higher amounts to an IRA than can normal employees. Also, if you pick the right stock and it shoots up in value you can make a lot of money really quickly.
This will impact a very small number of people at first if passed, but if not indexed for inflation it will impact a lot of people eventually and it opened the door for a lower limit in the future.
Then there’s the back door approach the government loves so much: set the limit high and look the other way when inflation transforms a “high” amount to average.
Good post.
AMEN!!!!
I think this is kinda distorting things here. As I understand it, this is not a raid on retirement accounts. All the proposal would do is eliminate the right to tax-free contributions to traditional IRAs once an IRA reached the $3 million level.
In other words, they’re not taxing the $3 million you successfully put away….they’re preventing you from contributing more pre-tax money to the IRA. Huge difference…..the proposal would basically be saying “Hey, you’ve managed to save $3 million….maybe you don’t need the tax incentive to shield the $17,500 you contribute to your IRA from taxes every year anymore.”
That was my interpretation of the rule as well, although I haven’t looked at it closely enough to know for sure. It seems that it’s part of a greater systemic crack down on tax shelters in general. I dream of the day when we do away with the current tax code and just implement a flat tax across the board. Simplify and streamline the process altogether. Although I do agree with Kevin that this could all lead to a very slippery slope. Between and state and federal income taxes, and sales tax, where does it end?
I don’t share your enthusiasm for a flat tax, simply because such taxes are extremely regressive. Taking 10% or whatever out of the pocket of someone making $30k a year hurts them WAY more than taking 10% out of someone making $3 million a year.
Ditto moving to a national sales tax — people closer to the poverty line spend a greater portion of their income on necessities (food, clothing, etc.) than those at higher incomes. I suppose you could find a way to make a national sales tax work (probably through refunds to poorer people, or by creating exceptions for categories like food and medicine), but I’d need to see the whole plan in writing.
Thank you, Anon, for both sensible comments above. “Flat-taxers” are all for being fair, except to those they have no problem seeing treated unfairly.