Obama Proposes $3 Million Cap on IRAs

I listened to several of the Sunday talk shows and while there was criticism of the President saying the CA attorney general was good looking, there wasn’t a word about his unprecedented attack on IRAs in his new budget proposal, which was made public on Friday.

The administration released a preview of their budget proposal which would save around $9 billion over a decade by capping the amount a person could withdraw or hold in their retirement plan, like an IRA.

According to an articles in The Hill,  Bloomberg, and Forbes one of the President’s spokespeople said that wealthy taxpayers can currently “accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

The President’s proposal will mandate that no one can withdraw from their retirement plan more than $205,000 per year.  The article suggests that means a cap of around $3 million for retirement.  The article is not clear how the proposal equates the withdrawal rate with the cap.  It is possible the President wants to either raise the RMDs, cap withdrawals, or cap the balance allowed in retirement plans, or perhaps a combination of all the above.

One way to interpret the sketchy details is this proposal may raise the required withdrawal rate on a balance of $3 million to $205,000, or about 7%.  Currently the RMD is around $120,000, so hiking the RMD to $205,000 would erode IRAs even faster, subjecting them to income taxes much earlier than currently.

Whether the cap is on withdrawals, the RMD is raised by almost two times, or they cap plans at $3 million; you can be sure IRAs will play a much smaller role in many American’s retirement plans.TaxForms

Of course, this is exactly what the administration is attempting to encourage.  The goal is overt wealth distribution.  This is Obama’s comment to Joe the Plumber that he needs to spread his wealth around in action.  By their own admission, the White House is making a grand edict that no one needs over $205,000 a year in retirement income or $3 million.  So, they intend to penalize those hard working Americans who save for retirement, encouraging them instead to join the ranks of those who spend today and look to the government for support tomorrow.

There is a hint in the articles I’ve read that the IRA cap is retaliation against Mitt Romney, who accumulated tens of millions in his IRA.  The inference is that the former Massachusetts governor must have done something illegal to squirrel away so much money in that sort of retirement account.

I am guessing the average American, who lives month to month and doesn’t have an IRA, will turn a deaf ear to this proposal, thinking that $3 million is significantly beyond what they will ever save.  While that may be true in today’s dollars, it most likely will not be true in future dollars.

A 25 year old who hasn’t begun to think about an IRA today, probably will have a significant change of opinion when they are 65. If inflation averages over the next 40 years what it has over the last 40 years, a $3,000,000 IRA will be equal to $575,000 today.  And what type of retirement will $575,000 buy you if you don’t want your money to run out over your lifetime?  An income of about $1,500 a month.

While we wait for more information, the intention of this administration is very clear. People who want to earn and achieve financial independence, which is above a level approved by the government, are becoming personas non gratis in the United States.

Rick Kahler

 

Rick Kahler is a Certified Financial Planner, President of Kahler Financial Group, author of the “Financial Awakening” blog, and a featured contributor on the CIF Blog.

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