As expected, the White House budget calls for legislation that would prohibit individuals from accumulating more than $3 million in individual retirement accounts and other tax-preferred defined contribution retirement accounts, such as 401(k)s. With the release of the full budget details April 10, it became clear the proposed cap would apply not only to individual accounts (such as IRAs and 401(k)s) but to defined benefit pension plans, as well.
THE FINE PRINT
The applicable text, found on page 33 of theWhite House budget proposal:
“Limit the total accrual of tax-favored retirement benefits.—The Administration proposes to limit the deduction or exclusion for contributions to defined contribution plans, defined benefit plans, or IRAs for an individual who has total balances or accrued benefits under those plans that are sufficient to provide an annuity equal to the maximum allowable defined benefit plan benefit. This maximum, currently an annual benefit of $205,000 payable in the form of a joint and survivor benefit commencing at age 62, is indexed for inflation, and the maximum accumulation that would apply for an individual at age 62 is approximately $3.4 million. The proposal would be effective for taxable years beginning after December 31, 2013.”
Savings account cap proposal
The $3 miillion club
Age distribution of individuals with an IRA balance exceeding $3 million in 2011 think about the future
Think about the future
Impact of age on percentage of 401(k) participants reaching new limit (adjusted for inflation), by age 65
Target date
With the expanding availability and use of retirement plan investment choices such as target-date funds, one might well assume that future asset allocations will be adjusted in accordance with age. Taking age adjustments into account in asset allocation, EBRI finds that 1.2 percent of those aged 26–35 in its sample would be affected by the adjusted $3 million cap by the time they reach age 65.
Floating cap $205,000
The retirement plan account savings cap in the White House budget proposal is reportedly tied, not to a hard dollar limit, but rather one that would finance, in 2013, an annuity of $205,000 per year in retirement, the IRC 415(b) annual benefit limit for defined benefit pension plans. The corresponding account balance threshold would fluctuate over time, based on discount rates—and that means that the number of accounts that could exceed the threshold in the future could be significant.
Think of the children
Time increases 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.
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