Recently there has been a proposal that would limit your retirement account balances. There isn’t a ton of information out on the current proposal at the time I wrote this (the official announcement should be out today), but what I know so far is that the proposal would limit retirement accounts to about $3,000,000. According to the report this would allow for a reasonable retirement standard with about $205,000 of income a year.
I had an initial gut reaction and then talked to a friend about the situation and now I feel I can see both sides of the situation. Below I have listed arguments for both sides. Which do you side with?
Go Ahead – Limit Retirement Accounts to a $3,000,000 Balance
Most ordinary, middle-class people will never have retirement accounts that reach $3,000,000. The tax breaks that currently exist for retirement accounts are there to encourage normal people to save for retirement. Limiting them to $3,000,000 shouldn’t affect their motivation at all.
Limiting retirement accounts to $3,000,000 would only get rid of tax breaks for people in the upper-middle class or higher. If they’re able to invest enough to reach a $3,000,000 cap they should easily be able to pay the taxes on any retirement investments beyond that. Currently, the upper classes are taking advantage of these tax breaks and deferring their tax payments to a later date because they can. Would the upper-middle class still invest without these retirement tax breaks? My guess is yes.
Just because retirement accounts are limited to $3,000,000 doesn’t mean that you can’t invest elsewhere. Once you hit the cap you can simply invest in a regular taxable investment account. You could make smart investment decisions in securities that would allow you to avoid taxes in other ways, such as municipal bonds, or simply pay the taxes on the normal type of investments you’d make anyway.
Don’t Touch My Retirement Accounts… They’re MINE!
Don’t you dare touch my retirement accounts! I’ve worked hard to live within my means and save for retirement to live the lifestyle I want later in life. I’ve made smart investment decisions that resulted in returns that exceeded my peers. I’ve maxed out my retirement accounts for years! Don’t punish me for that! I have a feeling a lot of people will react this way…
While $3,000,000 is fine for some people today, for others it simply won’t cut it. If I want to retire in Manhattan then $205,000 a year might not cut it for my family. That’s in today’s dollars at that. If the cap isn’t indexed for inflation what will my son do in 50 years when the buying power of $3,000,000 has significantly eroded due to inflation?
My contributions are already limited so why limit my total balance on top of that? If you want to reduce how much I can save in my accounts, simply lower the future retirement account contribution limits or eligibility requirements and people won’t be able to accumulate the large balances that inspired this proposal.
It isn’t like people are never paying taxes on these large balances. Once they enter retirement and begin withdrawing their retirement funds they must pay taxes. If you’re worried about people using retirement accounts to pass on tax protected money when I die then set up a retirement account tax for when people die.
Setting a cap on my retirement accounts worries me because if they set up this new limit then what else will be changed about my retirement accounts before I retire? Will they determine that I must keep my retirement investments in only a certain type of investment? Will they eliminate retirement vehicles all together and determine I must immediately pay taxes on my full balance? Or even worse… will they tax them like Cyprus?
The Reality of the Situation
In reality, the cap on retirement account balances is just a proposal at this point in time. I don’t think it will even get enacted in today’s gridlocked political environment but it does give us some good food for thought that how we save for our retirement may change in the future.
The retirement tax breaks we currently enjoy aren’t guaranteed. Hopefully the government won’t ever reach into our current accounts, but limiting how we contribute to our accounts in the future is fair game in my opinion. Even if there were no tax breaks I’d still be saving for retirement and I hope you would be too.
Is a $3,000,000 cap too low for some now and for many in the future? Could there be a slippery slope if this is enacted? I think both sides have valid points that should be considered. Which side do you fall on in this debate?