After President Obama released his 2014 budget proposal, new details have been coming out, including his plan to cap retirement accounts, which has been slammed by many critics. Obama’s budget scheme would prohibit taxpayers from accumulating more than $3 million in an individual retirement account.
Essentially, the plan would ban multi-million-dollar accounts like the one held by 2012 Republican nominee and former Massachusetts Governor Mitt Romney, who has at least $18.1 million and as much as $100 million, according to records released during the campaign trail.
There is a catch, however. The cap is also based on the amount you could garner from your retirement account if it were converted to an annuity (lifetime payments). The budget proposal lists $205,000 a year.
The White House released a statement Wednesday that states the proposal would generate approximately $9 billion in revenue to the United States Treasury Department.
“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,” the White House said.
Analysts see the administration’s budget proposal at odds with those who feel Social Security is unsustainable and may be insolvent in the next few decades. Therefore, for those seeking to build their retirement savings and even pass down their wealth to future generations, how will they fund their winter years?
“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, in a speech at the U.S. Chamber of Commerce. “If tens of millions of Americans reach retirement with insufficient savings, the impact on our citizens, our economy and our national security could be catastrophic, and not something we could solve for most retirees after the fact.”
He also explained the policy is disastrous at a time when Americans aren’t saving enough for their retirement. O’Hanley noted the cap would not create additional revenue because savers would pay taxes on retirement savings once the funds are withdrawn.
It is unclear if the president’s plan is subject to the cap of both the private and public sectors or only the private sector. It is also unknown if the cap would apply to just individuals or married couples as well. If it is the latter then it could cause serious damage to households across the country.
The retirement industry has come out against the federal budget proposal. Numerous industry leaders have issued comments to Employee Benefit News (EBN) that have criticized the whole capping concept.
“As business owners reach the cap, they will lose their incentive to maintain a plan, and either shut it down or greatly reduce benefits,” said Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, in a statement. “This would leave workers with a greatly diminished plan or without any plan at all.”
Any implementation of caps on retirement accounts could have long-term consequences. Presently, nearly two percent of those between the ages of 26 and 35 would be affected. What may be even more damaging is that the U.S. dollar will be extensively devalued in the next few decades because of policies by the Federal Reserve.
Some are positive the plan will be axed because, according to Accounting Web, taxpayer groups and retirement advocates have already begun to protest the proposals. Nevertheless, many are still cautious over an idea because it could be passed and lowered (some estimates say $2.2 million) in the near future.
The president’s capping suggestion isn’t a new policy measure. Forbes noted that the idea was first floated around during the presidential campaign when Romney’s IRA accounts were reported on.