Proposal to Limit Retirement Account Balances: Good or Bad?

This is not a political post but simply poses a question based on current events and a proposal that has been announced.

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?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.


  1. I’m not really worried about that limit and I don’t think most reach people would be either. They will just invest outside of their retirement accounts like people did before IRAs existed.

    I do think it is a slippery slope and would like to see the government stay the hell away from all our accounts, but so many people want the government to be their parent and take care of them.

    • Thanks for chiming in Brian! I’m not too worried about it right now either, but 20 years from now I probably will be!

    • They could “stay the hell away” entirely by taxing all income… then we could invest as much as we want. That would truly be retirement freedom

    • Just remember, it’s the government that is allowing you the tax advantages for these accounts, so I actually WANT them in my retirement business to keep helping me 🙂

    • Why don’t we limit the leeches on the gov’t dole?

      I’m tired of having people think the Government is not Us!!! Get off your butt, put down the crack pipe, get an education and be a productive member of society.

      We’re all just born equal, once you’re out of the womb, you’re on your own.

  2. I am not really worried about the limit, and think it’ll likely not pass with how screwed up Congress is. That said, I don’t like it simply based off of principle. Once the government can step in and say how much we can put away in our retirement accounts it becomes a very slippery slope in my opinion.

  3. I see both sides of the story. They aren’t saying that you cannot save more than 3M for retirement, just that you can only save 3M in a tax favorable retirement account….so I don’t think it’s a big deal.
    Still, I don’t really like rules all that much.

  4. I find it interesting that they would set a limit. There is already a limit how much you can contribute. This limit penalizes the successful investor. Watch out when they do that because successful people can find a way around it. If I were near my limit, I would convert some of it to a Roth IRA. Then you can only tax me once. I don’t think they know what this law or limit could do.

  5. Ha! I wrote on this topic yesterday, and chose a 50 year timeframe as well. The last 50 years of inflation eroded the dollar by a factor of 7.5X, i.e. that $3M will be worth $400K 50 years hence were inflation to have a similar five decades.
    I’ll wait to see the exact budget details, but I’m pretty certain that inflation is part of this calculation.

    One last thought, say my 401(k) happens to be worth $4M. There a simple workaround. A quick divorce and QDRO order that my wife get half the account. Next year, we remarry, each sporting a $2M retirement account. You heard it here first, folks.

  6. Economically, too much money tied up in retirement accounts affects annual federal revenue receipts. By limiting balances, there is more assurance that money will not be protected from creditors, and higher taxes. Additionally, more money in circulation via other financial instruments such as real estate helps boost economic performance in that industry. The net benefit of more real estate investing instead of diversifying with a range of financial instruments via retirement accounts is arguably higher in a macro-economic quantification.

  7. I would not care if they set a limit of to retirement account because I know in my heart I will never reach that $3-M limit! LOL. At any rate, should I be fortunate enough to reach the limit and have more money to keep, I will put them on other retirement investments and my children’s account as part of their inheritance. On the other hand, I doubt that Congress will pass this as a law.

  8. I find it absolutely ridiculous that they would even entertain such a decision. The fact is this, the government continues to make promises then somewhere down the line change their minds. I’d like to see where that $205k/year number comes from because my first thought is it comes at an assumption of investment returns. I find the guaranteed number of income at $30k/year based on what you would receive if that money was in a T-bond, savings account, or cd.

    This will be disastrous for the middle class, while the upper middle class will just find another way to circumvent the tax code.

  9. Hey, the government is leaking red ink and they are looking for ways to reduce it either by limiting deductions or taking away deductions we always thought would be there. The home interest deduction is the most popular. I’m surprised there’s no talk of eliminating or reducing that one.

  10. Today its $3M of your retirement accounts. Tomorrow its paying taxes on Roth IRA’s. Yes, this is a slippery slope, and we shouldn’t go down that road.

  11. There are seriously bigger things to look at limiting than retirements savings. The tax breaks are a deferral only. If the govn’t needs a way to increase the tax dollars submitted now… then find ways to stimulate the economy, create jobs and enable the people to manage their own finances.

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