Seeking to create more revenue, the President’s 2017 budget proposal would limit how much an individual can accumulate in their retirement plan which includes defined contribution (DC) plans like a 401(k), IRAs and defined benefit (DB) plans. The proposal would also limit IRAs inherited by anyone other than a spouse. The retirement industry is up in arms attacking this proposal which the President’s plan a couple of years ago when a passing a comprehensive tax bill was more likely.
Defending the President’s proposal, the U.S. Treasury Department explained, “Such accumulations can be considerably in excess of amounts needed to fund reasonable levels of consumption in retirement and are well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts,” The maximum amount that would qualify for a tax deferral would be $3.4 million or annual income of $210,000.
[graphiq id=”4n3Kwx38axL” title=”President Obama’s Budget Proposal” width=”600″ height=”620″ url=”https://w.graphiq.com/w/4n3Kwx38axL” link=”//www.graphiq.com/wlp/4n3Kwx38axL” link_text=”President Obama’s Budget Proposal | Graphiq”]
Which sounds reasonable until you look at unintended consequences. The President and over 25 states as well as NYC are seeking to make small businesses offer a payroll deducted retirement plan. But if owners or high level executives who might have accumulated a lot of savings are not eligible to receive a tax benefit, how eager would they be to create a retirement plan for workers?
Unlike other tax deductions, retirement plans are deferred with tax payers eventually paying the tax as they receive distributions. By limiting the deduction, future tax earnings will be lost which might not matter to politicians right now. Finally, with disparate DC and IRA accounts, it could be difficult for tax payers to even calculate their entire retirement savings.
So will the proposed budget pass as is? Or will the alternative proposal to require half of the maximum 401(k) contribution be put into a Roth 401(k) so the Federal government can realize increased revenue immediately be more likely? Regardless, retirement is a front page item for politicians whether it’s about access, fiduciary or tax consequences
