“The President Does want Americans to Save… Just not too Much! The Administration’s Proposal to Limit Retirement Plan Savings and the Stretch Out Period for Inherited IRAs.
Retirement Plan Savings
The President’s 2014 Budget Proposal, published last week, proposes to
automatically enroll workers without employer based retirement plans in IRAs
(unless an individual opts out). But just in case you save too much, it also
proposes to limit the total value of an individual’s combined retirement plans
to an amount sufficient to finance what it considers to be a “reasonable level
of consumption in retirement”. For 2013, the maximum annuity permitted is
$205,000 and the maximum permitted accumulation for a 62 year old is $3,400.000.
Of course the maximum permitted value will vary depending on your age, various
assumptions used in the calculation and it will have to be recalculated
Once your plans collectively reach the maximum permitted value, you would
be able to make additional contributions only if that maximum increases due to
changes to the applicable calculation (including cost of living adjustments),
or because the account balance of the plans fall due to other reasons such as
poor investment results. If the value of all your plans’ balances exceed the
permitted value, then the excess is treated similarly to an excess deferral
under current law. As stated in the Proposal: “the taxpayer would have to
include the amount of the resulting excess accumulation in current income and
would be allowed a grace period…[to] withdraw the excess….[and] if the taxpayer
did not withdraw the excess… then the excess amounts and attributable earnings
would be subject to income tax when distributed, without any adjustment for basis
(and without regard to whether the distribution is made from a Roth IRA or a
designated Roth account within a plan).” Such a change, if adopted, could have
significant adverse tax implications to individuals who have diligently saved
to finance their retirements and now find they have to liquidate, and take the
tax hit on, excess contributions. Interestingly, the Proposal does not mention
any limitations on maximizing contributions to non-qualified annuities or life
insurance even though such products offer tax deferral opportunities that are
similar to qualified retirement plans.
The Proposal also would require beneficiaries of inherited IRAs to
withdraw the entire balance of these accounts over 5 years. Currently, with
proper planning, heirs of a deceased plan participant can stretch out the
inherited plan over their own life times. The Proposal does make exceptions for
spouses, beneficiaries who are disabled, chronically ill, not more than 10
years younger than the plan participant and minors. In the case of a minor, the
5 year rule would kick in upon that child’s reaching the age of majority. So,
for those of you who don’t want your children or grandchildren to receive an
outright payment of your retirement assets on your death, your options may be
severely limited if this Proposal becomes law!
This is just another step, not toward equal opportunity, but
equally low savings for all!
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise
and Sun Valley, Idaho focusing exclusively in the areas of estate and trust
planning, probate and trust administration, asset protection, business law and
charitable organization laws. We represent individuals, families, trustees,
heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt
organizations, and family offices, as well as professionals and business owners
potentially exposed to future creditor claims.