April 15, 2013 at 12:57 PM ET
President Barack Obama’s 2014 proposed budget includes a provision that would cap how much people could keep in tax-preferred retirement accounts at $3 million. Some tax and estate-planning experts warn that, instead of targeting just the 1 percent, such a cap could affect up to 5 percent of the highest-saving Americans and people working for small businesses.
“It looks to me like they’re trying to remedy the Mitt Romney problem,” said Alicia Munnell, director of the Center for Retirement Research at Boston College, referring to reports during the last election cycle that the Republican candidate had tens of millions of dollars in an IRA. “These budget documents are political documents.”
According to the Treasury Department, the idea behind the proposal was to target an income threshold above which retirement savings would no longer receive tax-preferred treatment, which would bring in $9 billion over 10 years. "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 proposal said.
But Munnell says she thinks the cap is "silly."
"We’re already limited in how much we can put in these plans,” she said. “It’s going to hurt the upper middle class, not the superrich.”
A worker who invests just $7,500 annually from the age of 20 to 70 could hit that $3 million mark, assuming an investment rate of return of 7 percent, she said.
Dennis Sandoval, an attorney who specializes in estate planning, elder care and tax law, said professionals like doctors, lawyers and small business owners could easily have retirement accounts that exceed the proposed $3 million cap. “You can always save for retirement in other manners, but those other ways you can save aren’t necessarily as tax-efficient,” he said.
“I think a lot of people, when they first hear $3 million, assume that’s not going to affect many individuals,” said Jack VanDerhei, research director at the Employee Benefits Research Institute. The institute crunched the numbers and came to another conclusion.
The administration got to $3 million by calculating how much it would cost to buy an annuity with an annual payout of $205,000, the most someone with a defined-benefit pension can receive annually, according to the Internal Revenue Service.
When interest rates rise, though, the cost of buying that same annuity will drop, which means the cap would have to drop, as well, affecting more people.
“The $3 million is true today, but today is very misleading,” VanDerhei said. By his calculations, if the cap falls to $2.2 million, it would affect more than 5 percent of today’s workforce under the age of 35.
And that’s just those who could be affected directly.
Tax policy pros also say the proposal would be a logistical nightmare to implement. “In principle, you should be able to do it. In practice it could be very hard,” said Roberton Williams, Sol Price fellow at Urban Brookings Tax Policy Center.
Gathering necessary information from employees and keeping track of both their contributions and their aggregate 401(k) savings, including multiple plans and rollovers, would be just the first step. Fluctuations in the rates that affect annuity prices would force companies to keep tabs on which employees had reached the contribution cutoff, a number that could change frequently. The whole process could be enough of an administrative headache that smaller companies without big HR departments could just stop providing 401(k) plans entirely.
With the deep divides in Congress today, the proposal Munnell termed a “crazy idea” is a long shot, at best, to become law. “Retirement security is a really serious issue,” she said. “It trivializes how important this problem is.”