President Obama’s Retirement Plan Proposal

President Obama recently released his budget plans for the 2014 fiscal year, and one of the proposals contained in the budget is gathering a lot attention. The budget contains a proposal to cap the amount of money one could accumulate in tax-advantaged retirement plans and/or pensions, including 401(k) plans and IRAs. The idea behind the proposal is that any tax preference would be waived once an individual has put away “substantially more than is needed to fund reasonable levels of retirement saving.”

The White House has suggested a limit for tax-advantaged retirement accounts of $3.4 million in assets. At current finance discount rates, the owner of a $3.4 million dollar retirement account would be able to buy an annuity providing himself or herself with $205,000 a year in retirement income. With a retirement account cap limit of $3.4 million, it is estimated that the proposal would raise an additional $9 billion in tax revenue over the next ten years.

Some preliminary analyses of the proposal seem to suggest that President Obama is once again taking aim at the top 1% of income earners, a favorite target of his during the Presidential campaign. But an analysis conducted by the Employee Benefit Research Institute (EBRI) shows that the proposal could affect more savers. The EBRI’s analysis of the proposal shows that finance discount rates available in 2006 would have capped the retirement account owners to only $2.2 million, or 35% less in accumulated assets.

And while the proposal is being touted as a new revenue source, this proposal would not actually generate any new tax revenue. Instead of waiting for taxes to be paid on disbursements from 401(k) and IRA accounts, and/or pension income as they normally would at some point in the future, the proposed change merely accelerates the payment of a portion of these taxes. This additional revenue would allow the President to pursue his political agenda that would require additional tax funding or to shore up the budget deficit. But it is really a case of “robbing Peter to pay Paul,” and kicks the tax revenue problem can down the road and leaves future Presidents with revenue shortfalls. Unfortunately, this tactic has become all too familiar among politicians in recent years.

There is also a subtle nuance in the proposal that many analysts may not initially pick up on. The value of any pensions you may be entitled to is also included in the proposal. This represents a huge bookkeeping and tracking problem for taxpayers and the IRS. Imagine the nightmare of having to annually calculate how much your tax-deferred accounts are worth coupled with the value of any pensions you may be expecting to determine if you can make any tax-reducing contributions for the year. What would happen if the discount rates change drastically from one year to the next? Could you have a scenario where your retirement accounts are overfunded (according to the proposed limits) and you suddenly have a significant, yet unanticipated, tax bill due on prior years’ contributions?

Allan Sloan, senior editor-at-large for, goes so far as to point out an interesting consideration for taxpayers concerning this proposal. President Obama’s post-Presidential retirement package (funded entirely by taxpayers) is currently valued at roughly $6.6 million, almost double the $3.4 million proposed limit, according to Mr. Sloan’s research and calculations.

Given the current political and economic environment, few expect this proposal to gain much support or traction anytime soon. The situation still bears watching, however, as the assault on the wealthy to remedy our country’s financial woes is unlikely to subside anytime soon. We will continue to monitor this situation and any other proposed regulations that will likely have an impact on our clients’ financial plans. You can also be sure that we will continue to update you as new developments with this proposal materialize.

Sources: Wall Street Journal, InvestmentNews,