April 19, 2013
Arguing that some people have accumulated "substantially more than is needed to fund reasonable levels of retirement saving," President Obama's fiscal year 2014 budget proposed lifetime caps on the amount that individuals would be permitted to contribute to tax-qualified retirement savings vehicles such as 401(k) plans, defined benefit pensions or IRAs. According to the budget, such retirement savings would be limited "to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement or about $3 million for someone retiring in 2013." This amount represents the maximum accumulation annuity permitted for a qualified retirement plan for an individual age 62 under a defined benefit plan under current law, which does not impose any corresponding maximum limitations on the amount individuals may accrue in defined contribution plans. The limit would be indexed to inflation, and once a taxpayer has reached the cap, no additional contributions or accruals would be allowed with the exception of investment gains. An op-ed in last week's Wall Street Journal warned that some people are likely to change their savings habits due to the uncertainty of tax policy in the future, stating: "After this proposal, only a fool would pay taxes now to transfer to a 'tax-free' Roth IRA that the feds may decide to tax someday." Moreover, EBRI has noted that the President's budget proposal will disproportionately impact younger workers: "Time, which allows savings to accumulate in these accounts, tends to increase the probability that younger workers will reach the inflation adjusted limits by the time they reach age 65, with 2.2 percent of those currently ages 26-35 affected by the $3 million cap (adjusted for inflation), compared with just 0.1 percent of those ages 56-65." However, depending on inflation, EBRI reports as many as 6 percent of individuals could be impacted. The proposal would be effective for tax years beginning January 1, 2014.