President’s 2014 Budget Proposal Contains 4 Big Changes for Your Retirement

While much of the nation’s attention has been focused on the federal government shutdown that was avoided earlier this month and the mistake-plagued rollout of Obamacare, another proposal coming out of Washington D.C. has avoided much of the media and public’s attention. President Obama’s 2014 budget blueprint for 2014 includes the following four provisions that could have lasting effects on your retirement. Here are some of the proposed provisions that congress will evaluate in the near future.

1. Changing the COLA for Social Security. The new budget proposal includes changing the way inflation is measured for annual cost-of-living adjustments for Social Security recipients. By using a chained consumer price index for Social Security, it is estimated that the government would reduce government deficits by $230 billion over the next ten years.

A chained consumer price index is different from the current inflation measure in that it would account for goods and services substituted by consumers when price changes, thereby reducing the impact of inflation and allowing for a lower COLA. Unfortunately, this proposal hurts the most vulnerable retirees who depend on Social Security the most.

2. Capping Retirement Savings at $3.4 million. We reported on this proposal from the President earlier in the spring in this newsletter. This proposal would prohibit taxpayers from participating in the pre-tax deferral in their 401(k) or other defined contribution plans once they pass $3.4 million in assets. It is estimated that this action would raise about $9 billion for the federal government over the next ten years.

Unfortunately, this could have a negative impact on plan participants who are nowhere close to $3.4 million. How so? Once a business owner reaches the $3.4 million limit, there is little incentive to continue the plan, or make contributions to employees. So many workers could lose out on the opportunity to save through their employer’s plan, but also on the contributions that the owner would make on behalf of the employee.

3. Eliminating the Stretch IRA. The proposed budget also would eliminate the stretch IRA provision that allows non-spousal beneficiaries to stretch the proceeds from an inherited IRA over their lifetime. Under the proposal, non-spouse beneficiaries would now have to fully distribute (i.e. pay taxes on) the full inheritance amount within five years of the original account holder’s death. There are a few exceptions to this proposal, including minor children, disabled or chronically ill individuals, but the intent of this proposal is to recognize tax revenue much more quickly than permitted with the current stretch rules.

4. Automatic Enrollment in IRAs. Under this budget provision, employers who have been in business for at least two years and have ten or more employees would have to offer a payroll-deduction automatic IRA option to employees. This type of IRA contribution would not be subject to the same ERISA compliance measures that other defined contribution plans are subject to, making it very attractive for employers to offer.

Of the four proposed budgetary items, only the automatic enrollment IRAs would have a positive impact on those planning for retirement today. All of the other three proposals would limit how much an individual can save in a qualified plan, limit cost-of-living increases for Social Security or reduce the amount of time inherited IRA assets can grow before they are taxed. Coming hot off the contentious debt ceiling and government shutdown debates, these budget proposals are sure to stir even more debate in both parts of Congress.

Sources: BenefitsPro.com, The Wall Street Journal, InvestmentNews