There is always a target for bad tax policy, and these days it seems to be the rich. Every scheme designed to raise tax revenue is usually based on taxing the rich more, taxing the poor less, and generally redistributing wealth so that society is fair. Sadly, however, the non-wealthy but frugal and hard-working citizen often gets caught in the crossfire. And the fallout from bad policy tends to fall on them.
Take Obama’s 2014 budget proposal that would limit the accumulation amount in a traditional or Roth retirement account based on the cost of an annuity. For a person retiring in 2013 at age 65, the amount is about $3 million. It is expected that this cap on tax-advantaged retirement accounts would raise about $9 billion over 10 years.
Ever since Mitt Romney ran for president and it was revealed he had tens of millions of dollars in retirement accounts, there has been concern from the administration that some savers are just saving too much. These savers may have excessive amounts of tax-advantaged retirement funds when the time comes to retire. So after reading countless articles about how Americans are not saving enough, now we’re saving too much?
For a person who starts saving during their mid-life crisis, invests solely in bonds and contributes minimal amounts, a $3 million cap is nothing to worry about. Unfortunately, many people fall into this category. But as young people are faced with the realities of an insolvent Social Security system, it is entirely conceivable that they could have millions in an account by the time they reach retirement age. How? Read here.
If you bothered to read the piece, you may be asking me where I got my wild assumptions. They’re not that wild. If an individual contributes the maximum allowable tax-deferred contribution to a 401(k) plan for 40 years (and that contribution is adjusted upward annually for inflation – which I assume to be 3 percent), and then they make additional “catch-up” contributions at age 50, and she invests in the stock market and receives a nominal rate of 12 percent (don’t laugh – the rate of return for the stock market from 1946 to 1990 was 12 percent), she could have $6 million in retirement cash in today’s dollars. This has nothing to do with being wealthy, but it has everything to do with being a consistent saver, regardless of income.
The likelihood of any sane Congress member incorporating this limit into a budget bill is small. But it’s always a good idea to get ahead of hair-brained schemes before they happen.