Wednesday, April 10, 2013

Will IRA's Lose Some of their Tax Deferred Status?

Ever since they were introduced in the early 1980's, IRA's have been widely promoted as a sound way for individuals to save money for retirement.

Since the original IRA's were introduced there have been a whole alphabet soup of new forms of IRAs, but all carry the basic concept that any money placed in an IRA will not be subject to tax until withdrawals are made.

But now it appears that the Obama administration wants to change the rules for IRA's, at least for the wealthiest savers.  Here's an excerpt from CNN:

 President Obama on Wednesday is expected to announce a plan that would prohibit individuals from reaping tax advantages on IRAs and other tax-preferred retirement accounts when the funds exceed $3 million.

By proposing the cap as part of its budget, the Obama administration is taking aim at those who stash many millions of dollars in tax-advantaged retirement accounts -- which it argues is more than enough to retire comfortably.

A $3 million balance in a tax-preferred account like an IRA would currently allow a saver to finance an annuity of $205,000 per year in retirement. Removing the tax advantages for funds exceeding that threshold would save the government an estimated $9 billion over a decade, according to a senior administration official.

Yesterday's Washington Post blog The Hill suggested that the President's proposal is at least partially politically motivated, since the amount of estimated additional revenue to the government is only $9 billion over the next 10 years:

President Obama’s budget, to be released next week, will limit how much wealthy individuals – like Mitt Romney – can keep in IRAs and other retirement accounts. 

The proposal would save around $9 billion over a decade, a senior administration official said, while also bringing more fairness to the tax code. 

 The senior administration official 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.”

Under the plan, a taxpayer’s tax-preferred retirement account, like an IRA, could not finance more than $205,000 per year of retirement – or right around $3 million this year. 

Romney, Obama’s 2012 opponent, had an IRA several to many times that amount, leading to questions about how the former Massachusetts governor was able to squirrel away so much money in that sort of retirement account.

I don't know whether this proposal will actually pass Congress, but I think it sets a a dangerous precedent.

If the government can retroactively change IRA rules for the wealthiest savers, what would prevent future budget proposals from taxing all IRA's (i.e., a "wealth tax)?

This proposal - coming at a time when every government official in recent years has been pushing individuals to save more retirement - seems particularly poorly-timed.