Wednesday, November 6, 2013
Now He's After Your 401(k)
Updated April 12, 2013 12:13 p.m. ET
How many times have you read financial-advice stories lecturing you to max-out on your IRA, save as much as you can in your 401(k), and even pay taxes now to change your regular IRA into a Roth IRA that will be tax-free until you die?
Well, be careful how much you save.
Assistant OpinionJournal.com editor Allysia Finley on President Obama's attack on tax deferred retirement accounts.
A lot of job-switchers are ignoring what may be one of the best options to get the most out of their retirement: Moving their savings into their new employer's 401(k). MarketWatch's Jim Jelter explains the benefits. (Photo: AP)
That's the message in President Obama's budget for fiscal 2014, which for the first time proposes to cap the amount Americans can save in these tax-sheltered investment vehicles. The White House explanation is that some people have accumulated "substantially more than is needed to fund reasonable levels of retirement saving." So Mr. Obama proposes to "limit an individual's total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013."
Thus do our political betters now feel free to define for everyone what is "needed" for a "reasonable" retirement. Not to be impertinent, but does this White House definition include being able to afford summers at age 70 at Martha's Vineyard near the Obamas?
The feds may think $3 million is all you need after a lifetime of work, but that's roughly the value of a California police sergeant's pension if she works for 30 years, retires at age 50 and lives to normal life expectancy.
Out in the private economy, people generally have to work longer than that before they retire, and some of them do manage to save significant amounts. We're talking about people who work for decades and abstain from buying the bigger house or the new car so they can contribute the maximum to their 401(k)s or IRAs. The people who defer gratification and build a nest egg to avoid becoming a burden on their kids or their fellow taxpayers. The people whose savings finance productive enterprise. You know, the bad guys.
Best-selling books used to celebrate these "millionaires next door" who worked and saved their way to financial independence. But now Mr. Obama wants to treat them as if they all got rich by sheltering investments in the Cayman Islands or extracting bonuses from bailed-out banks or scooping up sweetheart mortgage deals from allegedly nonprofit universities. Someone should tell the President that most Americans can't swing the bonuses that his Treasury Secretary Jack Lew arranged at NYU and Citigroup. C +0.50%
The budget offers few details on how the government would enforce this cap across a worker's various accounts, but you can bet it would be complicated. Right now the government doesn't track all tax-deferred account balances. Financial firms don't have to send IRS 1099 forms to investors unless there's a distribution, nor do the firms know how much customers hold at other institutions.
So the IRS would get new power to impose new burdens on millions of taxpayers. And all so the government could raise what the White House claims would be $9 billion more in revenue over 10 years, as if people wouldn't change their savings habits. After this proposal, only a fool would pay taxes now to transfer to a "tax-free" Roth IRA that the feds may decide to tax someday.
The Occupy Wall Street crowd will be cheering this ideological assault, but the occupiers who mature into productive citizens will someday find themselves in the cross-hairs. The cost of a $205,000 annuity changes over time and inflation will reduce its value. The Employee Benefits Research Institute points out that such an annuity stream could be had for as little as $2.2 million, not $3 million, within the last several years. As a result, EBRI estimates that under such a scenario as much as 6% of today's younger workers age 26-35 could end up hitting the cap.
Liberals say tax-advantaged plans are unfair because the affluent benefit more than the poor. It's true that you can save more when you earn more, but the savings are also channeled into productive investment and they are eventually taxed when they're withdrawn. Congress wanted to encourage people to save, especially as it understood that Social Security and Medicare will become increasingly unaffordable.
The Treasury Department says its proposal would still allow existing accounts to continue to grow tax-free until distributions occur, but it would prevent new contributions once a saver hits the cap. We'd be happy to support a reduction in these tax incentives as part of a tax reform that reduced tax rates. But until that happens, these tax incentives are ways that thrifty Americans can shelter savings from punitive tax rates.
The Administration's political motive here is two-fold: First, it's a redistributionist play and a revenue grab. But for many on the left it's also about reducing the ability of individuals to make themselves independent of the state. They have always disliked IRAs, just as they oppose health-savings accounts, because over time they make Americans less dependent on federal entitlements or transfer payments.
Amazingly, Mr. Obama has surveyed the economic landscape and somehow decided that it's time to discourage savings if you make more than he thinks is "reasonable."