Obama budget to go after IRAs

[murphy_p_t]

http://thehill.com/blogs/on-the-money/d ... althy-iras

IRAs are in their sights.

[RuralEngineer]

Glad to hear King Obama has decreed what a "reasonable" level of retirement savings is.

[Pointedstick]

I can't believe he's really this stupid. Has he ever heard of the AARP?? They're going to hammer him on this. What an idiotic and politically tonedeaf move. It's like he's decided to destroy his party's credibility by putting his weight behind all the worst and least popular ideas the Democratic party ever came up with the moment he was re-elected.

I have to say, I was incredulous toward all the people who suggested that Obama was going to change and become Mr. Super Socialist if he was re-elected, but I have to admit I was wrong.

[moda0306]

PS,

Is creating asset maximums in accounts with umpteen other restrictions and limits really that big of a deal?

The IRA contribution max is $17,500.  If you do that for 40 years, you'll have $700,000 in contributions. Some of the trickery that allows these things to "grow" to tens of millions of dollars seems like where this legislation is targeted.

If this were legislation to tax Roth IRA distributions I'd agree with your enthusiasm.  Am I reading something wron in the article?

[D1984]

I can't believe he's really this stupid. Has he ever heard of the AARP?? They're going to hammer him on this. What an idiotic and politically tonedeaf move. It's like he's decided to destroy his party's credibility by putting his weight behind all the worst and least popular ideas the Democratic party ever came up with the moment he was re-elected.

This. From a purely practical standpoint of having a chance at passage, he would have done far better in either:

A grandfathering in everyone's current IRAs and Roths and allowing no new contributions (this is what they did with MECs in the late 80s and non-adequately diversifed variable annuity contracts in the 70s...grandfather in anyone who had them and slam the door shut on any new ones or new contributions to existing ones),

or,

B. Simply trying to get the whole notion of an "IRA" abolished and simply let/make everyone have their current IRA's assets at its current value with no tax due on gains (or at least with a 2 or 3 million deduction so it would only hit "those greedy rich people"...note that I am putting words into Obama's mouth and state of mind when I say that, not my own)....voila, no more tax deferred compounding in non ERISA-qualified retirement accounts

Actually, I'm surprised that Obama (or anyone else) didn't try to do this sooner. Defined benefit pensions (whether traditional DB plan or 412 plan) have certain asset limits you cannot exceeed based on how much income the assets are assumed to generate in your retirement; you do get some leeway on interest rate and actuarial assumptions but IIRC (MT can correct me on this if I'm wrong as he does this kind of thing for a living) if your pension plan--based on a given set of actuarial and interest rate assumptions--can pay more than 205K (or maybe the limit is 210K per year now) to you when you retire then it is considered "overfunded" and further contributions are frozen in whole or in part until its gets back to merely "adequately funded" again; furthermore, if you try to roll over the money in an overfunded DB plan certain laws (the 1994 GATT and the 2006 PPA among others) place qualifications on how much you can roll over as a lump sum and the rest is "frozen" and can't be rolled over...I'm not sure what happens to that part...perhaps it has to be taken as a lifetime annuity instead of as a lump sum?).

The big question is can it pass the House....theoretically maybe, but I'd like to see what kind of huge quid pro quo the Republicans extract for agreeing to this sort of thing...assuming they even agree to deal (and quite reasonably why should they...something like this will be none too popular with the retired set...especially the upper middle class and above). Until then, I'd say it likely won't pass in anything near its current form.

[Pointedstick]

PS,

Is creating asset maximums in accounts with umpteen other restrictions and limits really that big of a deal?

The IRA contribution max is $17,500.  If you do that for 40 years, you'll have $700,000 in contributions. Some of the trickery that allows these things to "grow" to tens of millions of dollars seems like where this legislation is targeted.

If this were legislation to tax Roth IRA distributions I'd agree with your enthusiasm.  Am I reading something wron in the article?

There are many ways to accumulate more. How about SEP-IRAs, or 401k rollovers from plans that allow 50k/yr? How about capital gains within the IRA? If you strike it rich and your 500k turns into 3.5 million, what happens to the rest?

But really, it's about the principle of the government telling you what's "reasonable" for your own damn life.

"$3M in an IRA is reasonable."

"16oz in a soda is reasonable."

"10 rounds in a magazine is reasonable."

It's incredibly insulting and infantilizing for the politicians that the people elect to presume that they know better than the people they serve what is and is not reasonable. They should be running the country, not people's individual lives!

Didn't I get you agree in one post a while back that the government shouldn't be hyper-regulating the details of people's affairs? This is the kind of thing I'm talking abut. It's none of their damn business and I don't appreciate being treated like a child by people who prove time and again that they themselves are ignorant buffoons who know nothing about what they have been--for reasons unknown to me--granted responsibility over. For example:

https://www.youtube.com/watch?v=c7m6aew ... be&t=1m16s

http://www.realclearpolitics.com/video/ ... oaded.html

https://www.youtube.com/watch?v=ospNRk2uM3U

[WiseOne]

I have to say, I was incredulous toward all the people who suggested that Obama was going to change and become Mr. Super Socialist if he was re-elected, but I have to admit I was wrong.

How, exactly, does proposing to limit a government benefit make Obama a socialist?  I guess you're viewing this as specifically a tax increase?  Then what about Mitt Romney's idea of capping itemized deductions at $50K?  They're the same sort of "tax", without actually increasing tax rates.  If you condemn one, you must also condemn the other. 

I figured they'd think of this at some point, and probably before trying to limit mortgage interest deductions.  The latter would annoy a lot more people than the AARP, plus it would devastate the housing market at a particularly bad time.

[Pointedstick]

In addition, ganging up on tax-deferred retirement plans is like to backfire spectacularly: if something like D1984 described were to happen and more people found themselves with taxable retirement accounts, that would be a hugely larger constituency that would strongly favor abolishing the capital gains tax or greatly raising the income limit before one's capital gains are subject to it.

[moda0306]

PS, 

But it's by the grace of government that we're allowed this special vehicle in the first place.  A limit on total assets seems no different to me, fundamentally, than a limit on annual contributions, or RMD's, or rules around accessing the money, or rules around the assets you can hold within it.

To me this feels a lot like someone angry at te government for painting lines on the roads they build for us to drive on.

This just seems like another, of about a dozen, annoying rules places around an IRA.  Maybe I'm just becoming complacent.

[Pointedstick]

PS, 

But it's by the grace of government that we're allowed this special vehicle in the first place.  A limit on total assets seems no different to me, fundamentally, than a limit on annual contributions, or RMD's, or rules around accessing the money, or rules around the assets you can hold within it.

To me this feels a lot like someone angry at te government for painting lines on the roads they build for us to drive on.

This just seems like another, of about a dozen, annoying rules places around an IRA.  Maybe I'm just becoming complacent.

You're right to a certain extent, but it's only by the grace of government that we need IRAs to shelter wealth from the taxes they would otherwise impose. They didn't come along and grant us these wonderful magical investment holding vehicles; rather they first imposed punitive taxes on investments and then carved out exceptions for people who follow their annoying rules.

For what it's worth, I'm all in favor of the other annoying IRA rules going away too. In fact, I'm strongly in favor of the whole unnecessarily-complicated IRA vehicle itself becoming obsolete by eliminating capital gains taxes altogether. They raise a paltry amount of revenue and introduce a great deal of complexity into the tax code.

So yes, I'm complaining about the lines in this particular road, but I hope you'll admit that we're only on this road in the first place because they're chasing us with wild dogs. Okay, this metaphor is terrible.

[notsheigetz]

I can't believe he's really this stupid.

I don't think he's really that stupid and I also don' think his sociopathic personality is really any different from the rest of them. Some people just had higher expectations based on...... well, whatever.

[moda0306]

Well yeah taxes suck. I'm just saying that this isn't any kind of burden worth having a shitfit about.

Oh, and taxes on labor are far, far worse than taxes on capital.

Didn't you have your own experience with this?

And let's be honest, another reason to get on this forum to work around the tax code is more fun than burden!

[D1984]

PS, 

But it's by the grace of government that we're allowed this special vehicle in the first place.  A limit on total assets seems no different to me, fundamentally, than a limit on annual contributions, or RMD's, or rules around accessing the money, or rules around the assets you can hold within it.

To me this feels a lot like someone angry at te government for painting lines on the roads they build for us to drive on.

This just seems like another, of about a dozen, annoying rules places around an IRA.  Maybe I'm just becoming complacent.

Well, there is the fact that they are changing the rules of the game halfway....I mean, what happens to someone who now has $4 million in an IRA because he/she saved and invested well? Does it get confiscated? Converted to an annuity at a government-mandated rate? Forced out of the IRA in one year? Forced out as excess RMDs over several years even if the IRAholder isn't yet at retirement age (which leaves an interesting and possibly illegal isssue with someone who has a Roth and is below 59.5)? Had the government put the limit on in the first place, I don't think anyone would like it but it would be no different than the rules that were already in place for pensions. But (to continue PointedStick's metaphor) it would be as if we were all driving along on a road with a 65 mph speed limit and then one day the government decided that the speed limit was 45 mph, announced with no wanring that it had changed, and then starting having the highway patrol write everyone tickets. If you want to set the "rules of the road",  so to speak, to be restrictive from the get-go that's one thing, but don't go changing those rules on people who were already playing by the (currently legal) older rules.

[Pointedstick]

Well yeah taxes suck. I'm just saying that this isn't any kind of burden worth having a shitfit about.

Oh, and taxes on labor are far, far worse than taxes on capital.

Didn't you have your own experience with this?

And let's be honest, another reason to get on this forum to work around the tax code is more fun than burden!

Heh, you've got that right. After cooling down a bit, I guess it's not the end of the world. But I stand by my statements that it was a politically dumb thing to do and that the amount is so small it's worthless. I mean, $9 billion projected savings over a decade = $900 million a year = a rounding error. It's like Republicans grousing over funding for Planned Parenthood or NPR that barely amount to more than a few hundred million. It's never about the money; it's about sticking it to people you don't like with the budgeting cycle and tax code. Crap like this just stirs the pot and causes us to hate each other a bit more for no real benefit to anyone.

D1984 is right, too. Setting the rules is one thing; changing the rules on the players mid-game is another. That's one of the things that I find so odious about government; you have no contract, so they can just change the laws any time they want and you just have to live with it. There's no way you can have any stability in the implicit social contract.

[moda0306]

D'84

I agree. There's some hairy parts of it.  But I really don't see some of the worst of what you say. I guess we'll see. 

[moda0306]

Ps,

I agree it's mostly pointless and very potentially bothersome if they don't do a grandfathering of some sort.

And very politically stupid if they don't keep it at high enough of a level.

[craigr]

One reason I never did a Roth conversion is I feel when I access those funds they will have come up with a way to tax me on them in some other way. I figured I'd risk putting the taxes off as long as possible in a traditional IRA with the expectation that the rules would be changed in some way when I need the money.

As for retirement savings in general. Really I don't think they want people to actually save. If they did, then the idea of the IRA would have been altered drastically years ago. Self-directed accounts have a tremendous number of problems. Not only are the limits much too low to allow most people to save adequately even if they can max them out, they are structured so that Wall St. marketing can make a killing on selling very bad products to both IRA and 401K users.

If the government got anything right, it is the TSP that their own employees can use. It has simple index funds with simple letters for names. No flashy marketing. No gimmicks. No high fees. It is mostly done correctly but would never be allowed to include all citizens. Wall St. would have a heart attack being cut out of the action.

[notsheigetz]

One reason I never did a Roth conversion is I feel when I access those funds they will have come up with a way to tax me on them in some other way.

I have never done a Roth conversion either but I have opened  Individual Roth accounts for both me and my wife and have been funding them to the max for the past few years.

It is true that when it comes to the tax liability of these funds we know we are dealing with lying, stealing, bastards of the worse kind, but we really don't know how it will all play out in the lung run so we are just hedging our bets.

[AdamA]

One reason I never did a Roth conversion is I feel when I access those funds they will have come up with a way to tax me on them in some other way. I figured I'd risk putting the taxes off as long as possible in a traditional IRA with the expectation that the rules would be changed in some way when I need the money.

You know...that's a really good point that I've never really thought about.

Convnetional wisdom is that Roths are better...one in the hand, right?

[AgAuMoney]

The IRA contribution max is $17,500.  If you do that for 40 years, you'll have $700,000 in contributions.

Where in the world did you get that number?  Maybe looking at less than 1/2 of the 401(k) rules?

The 401(k) max personal contrib is $17,500 with a bump up adder of $5500 but the employer can add to that to a total limit of $51,000.

The IRA max contrib is currently $5500 with a $1000 bump up for 50+.

401(k), pension, early retirement incentives and many other things can be rolled into an IRA.

Furthermore, the proposal has nothing to do with contributions.

As a simplifying assumption, instead of gradually accumulating up to $700,000 in contribs say $350,000 for 20 years at 8% annual average ROR.  That's over $1.5 million, and as shown above there are many currently legal ways to put way more than $17,500 per year into a tax advantaged account.

Everybody knows gov't can change the rules at any time.  But to have the temerity to propose punishing people for following the previous rules...

All regarding a fraction of 1 day's current spending to be accumulated over many years...

What's the real agenda?  Is this a distraction for something else or is this the outlandish proposal which will make the next one seem more reasonable?

[craigr]

I use a traditional IRA. I did not convert it to the Roth. I'm kind of cynical about the whole thing that they are going to screw me later if I choose to pay taxes now. It may not be a direct tax, but I figure it will be some kind of means testing, etc. It's easy to vilify savers and take advantage of them when the majority has no savings. So just keep that in mind when someone says that there is no way IRA/Retirement savings will ever be touched. I don't buy it myself.

But I'm cynical. And the cynic in me is avoid the taxes now while I can and worry about the other possibilities later. My spidey sense simply is that if I pay taxes now to do the Roth they are going to get me in some other way when I access those funds.

[moda0306]

The thing about roths that doesn't apply to IRAs is that with a Roth if you have to make a lump sum pivot out of that position it's not difficult and won't result in a taxable event in the year you sneak out of a tax hike.  You can usually see changes coming on this stuff from a mile away.  With the traditional IRA it's very difficult to undo without blasting yourself into higher tax brackets. 

If you hedge traditional and Roth, and pay attention to both Roth and traditional rules in the pipe, ready to pivot, you should be in a great spot long-term. 

[clacy]

We all know how this would end. They purposely would not index the $3m amount to inflation so 20 years from now it would still be $3m which would be more like $1m real.

Obama is just stupid enough to play his hand, for a budget that his own party likely wont even bring up for a single vote

[JonathanH]

I'm willing to bet that this talk of going after wealthy IRA's is way to get the conversation started. There aren't that many wealthy people to make a big enough dent in the debt and they will want to change the rules and grab middle income savings.

[MachineGhost]

I agree.  What sort of strange logic led to an IRA contribution max less than a third of that of a 401k?  It's horrible.  I also use only traditional 401k's/IRA's.  I simply can't stand to pay income taxes on the contributions.

It's best to do a Roth conversion in the year you retire, when you are in a lower tax bracket.  And do a 1/4th conversion a year for 4 years to keep the tax bite down.  In fact, a few years ago, you could do a Roth conversion for any 2 years and not pay any taxes due until the 2nd year.  If market goes down after the conversion, you can just recharacterize the loss portion and get the taxes back.