Monkeys,
An interesting tid bit from President Obama's proposed budget was noted by Bloomberg, namely the capping of IRA's to $3 million. Well, to me, "interesting" isn't the right word, from where I'm sitting, "very stupid" seems more appropriate, but perhaps I'm being too harsh and someone can elucidate as to why it's not monumentally foolish.
Apparently, the thought of accumulating vast amounts of money via IRAs is a bad thing, and the article points out the impetus for this action is none other than, Mitt Romney:
The most prominent taxpayer with a multimillion-dollar IRA is Romney, the 2012 Republican presidential nominee and co- founder of Bain Capital LLC. Romney disclosed in public filings during the campaign that his retirement account held between $18.1 million and $87.4 million. At one point, the maximum exceeded $100 million.
You might be asking yourself, "Aren't there limits in place for IRA and Roth IRA contributions?" And yes, obviously, as I assume most everyone on WSO knows, there are limits, and they're not very high. So maybe you're wondering, "Well, how did Mitt Romney accumulate such a huge IRA in lieu of these limits?" Luckily, the article has a potential answer:
One possibility is that Romney included Bain investments valued at close to nothing that later grew exponentially.
So, Mitt Romney held risky investments in his IRA that paid off. Good for him. I suppose you could debate just how risky the Bain investments were (assuming this is how his accounts grew so large), but it's probably safe to say an investment that started close to nothing must have had some risk otherwise, wouldn't it have started further away from nothing? But, I digress.
What strikes me as utterly ridiculous, is if the administration were interested in keeping retirement accounts from growing to Romney sized proportions, why $3 million? Why not $30 million? Why not $13,893,185.69? Deep down, I suspect that after watching all of ING's "What's Your Number" commercials, the president figured that $3 million was good enough.
Come on, the guy in the commercial only needs $1,086,523, clearly a $3 million dollar cap will be sufficient for the rest of human history. I mean, if a Dutch bank says it, it must be true!
Am I being too rough on the president? Is anyone here completely certain that $3 million will be sufficient to live on through retirement? Or is this potentially one of the dumbest ideas to date?
Isn't this just a round-about way of taxing the rich?
That seems to be what this really boils down to isn't it?
Obama got tax increases as when the debt ceiling was increased. Now he wants more. He isn't serious about cutting the budget and Republicans should stonewall this. When Obama finally realizes that we need to cut spending and cut it now, then I will support working with him.
Yes, but when people make a lot of money in investments, it's not fair (pronounced Fay-er in your best Edith Bunker voice). God, I love Hyde Park liberalism.
Incredibly stupid idea and I doubt anything like that would ever be enacted. He might as well just mandate that IRAs have to be invested in Treasuries at all times.
It's impossible to be too tough on this administration...so much idiocy. Deep down they don't want people to save, they want us all to retire and depend on whatever the government sees fit to give us. I'm not saying the republicans are any better - I feel our country is in for a world of hurt as the politicians are ruining it, and our populace is too dumb to get it.
Haha, yes. I love our country, but I'm terrified by the path it is taking. Career politicians have no incentive to do anything but preserve their spot in office, and things won't get better until we start to elect people that truly want things to change. The general public is too ignorant of what the government is doing (possibly because our education system is crap).
We have ongoing, present day examples (I'm looking at you Greece) of where we are going. Never ending government growth is not possible. At some point, it will tip over.
Only thing that will save us is a reduced government. We need to close agencies, slash spending, reduce benefits.
FYI - IRS can no read your emails without a warrant.
http://news.cnet.com/8301-13578_3-57578839-38/irs-claims-it-can-read-yo…
This doesn't strike me as all that extreme. $3 million for retirment seems perfectly reasonable provided the cap is raised periodically or tied to inflatoion or something. The goal looks like it's to raise the effective tax rates of the rich. If you're against that then yeah you'll be against this. In what way is this "monumentally foolish" though?
I haven't looked at the details of this, so I can't say if I'm for or against it, but you don't provide any reasons for why this is bad other than dismissing it as "very stupid". Yes this may raise your taxes, but that doesn't necessarily mean it's stupid.
I suppose I wasn't terribly explicit with the reasons, but what I was attempting to get across was that the idea is both redundant and arbitrary, and that redundant and arbitrary ideas are very stupid (I'm fairly certain this is universally true). It's redundant because we already have contribution limits on IRAs which, in theory should constrain their growth, and it's arbitrary because no two people have the same needs in retirement, so selecting a single amount (nevermind the abitrariness of selecting $3 million in particular) for everyone is pretty absurd.
Far too often I hear Obama bashing without any fair reasoning behind it. You posted an an Obama proposal, called it very stupid, and in came surge of posters with pitchforks at the ready. Barely anyone even bothered to notice that this only affects one tax advantaged retirement account and puts the limit so high that hardly anyone would even hit it. Thanks to SouthernBanker's comment we can see that this is really targeted at stopping a tax planning strategy that attempts to subvert the the purpose of IRAs, but somehow people equate this to stealing from citizens.
To your points of it being arbitrary and redundant; It is apparantly not redundant given that there are IRAs that are above the $3 million cap. Also it appears that the cap is not arbitrary in the sense that it is above what somone making maximum contributions and earning a reasonable return would have by retirement. The difference between 3 million and 3 million and 1 is arbirtrary, sure, but once you are over a reasonable return threshold does it matter? You are right that no two people have the same retirement needs, but given that this only touches IRAs and not 401ks or any other private retirement accounts it does not appear that the government is trying to set an acceptable level of retirment savings, but rather trying to target a specific tax planning strategy that is not in line with original intent of IRAs.
I love how Obama is now deciding how much is enough to retire. Wasn't away that he was a financial advisor now. How about you end deductions and cut spending.
$3.77 Trillion budget. Absolutely sickening.
i completely disagree with this idea. i think its another way for the government to tax those whove been successful and smart about their investment decisions.. not to mention those who started saving very early.. but just to play devil's advocate (or maybe clear things up a bit), he's not limiting the amount to which your IRA account can grow, he's limiting the amount that grows TAX FREE. anything above $3,000,000 is taxed, presumably, at capital gains tax rates.
Long time browser, first time commenter:
People are getting this Romney story wrong over and over again... he didn't get it by investing 5k at a time and nailing it on PE returns (FYI - the math doesn't work on that...)
He (likely - not disclosed but only reasonable answer) got the huge IRA by placing his partnership stakes in various Bain funds into the IRA at a zero (or near zero) basis, when in reality they were much more valuable.
I don't know enough about the issue to weigh in on whether there are positives in being allowed to contribute partnership stakes into one's IRA.
Just thought I would inform that discussion.
I'm no fan of Obama, but think that this limit has nothing to do with how much money one needs to save for retirement, and everything to do with his effort to disallow the wealthy from using tax advantaged programs to protect wealth. As someone who expects to make a good amount of money, I'd love to be able to squeeze out every tax advantaged account I can (and I do) but I do understand the principles here and think this may actually make some sense.
Edit: emenems hit the nail on the head for why i thought this made sense
Wow, I really am in agreeance with IlliniProgrammer, he really did a good job of laying that out.
I have one objection: the setting of an actual $figure limit. Here's why.
This is exactly why gov't programs are in deep shit: they DO NOT adjust for this and are not regularly updated. Look at the FDIC guaranteed insured amount as the most blatant example. Objecting to tax increases just to do it isn't my thing, and in this case the policy will work agains the average person after a period of time...realistically, have you SEEN how much currency is being dumped into the system????In order for IRAs to not be abused for tax shelter purposes, thinking along these lines is a better idea:
Can anyone here go into this in detail?Does this apply only to IRAs and not 401ks? IRA contribtions are capped at around $5,000. To hit 3 million you'd have to contribute 5 grand a year for 40 years while earning a return of over 11% per year. Am I missing something?
Edit: SouthernBanker thanks for the explaination.
Government thinks it has a right to your money. Plain and simple. Instead of cutting spending and reducing the size of government it simply looks for other ways to rob and steal from its citizens.
$16T in debt and what do we have for it. Nothing.
I'll play devil's advocate for a bit.
To my understanding, the goal/rationale for the government to create a tax-break through IRAs was to incentivize individuals to save for retirement independently so individuals would not end up with nothing at retirement (and potentially dependent on others such as the government). If this is the goal, does capping IRAs at $3m reduce the effectiveness of the policy? The types of people that were the original target of the policy (the people the government is trying to incentivize to save more) probably aren't the type of people that end up with $3m in their IRA.
I'm okay with removing this tax-break at higher end of the spectrum (seems fair). However, the general issue I have (and I assume that many of you monkeys have) is that I don't trust Congress to use funds effectively (too short-sighted; misaligned incentives; out of touch).
Was anyone complaining about this? I don't even think this was a talking point for the Maddow crowd.
I don't see how this will raise much revenue. The tax breaks for the people in question are pretty small - even in retirement, they will likely be in a high bracket. It's just one more complication to the tax code.
I'm reading (ok, Ctrl-F' ing) my way through the budget today. The damn appendix is 1300 pages.
http://www.npr.org/blogs/money/2012/05/14/152671813/50-years-of-governm…
Government spending over the years.
I'm mad about this tax for the same reason I'm mad about every tax increase - because I've looked at 1) growth in spending and 2) lack of anything to show for it, whether we're talking war on drugs or education spending since LBJ.
Let's figure out what we need to spend, then figure out how to pay for it. But that would require not voting for fucktards in the blood or crip party. This is just another money grab because they can't figure it out, so I don't really give a shit if it's not hurting the rich IRA owners "that much."
Keep cheering while the government keeps enslaving you. How about a spending cut? How about we remove the child tax deduction or home interest.
This isn't about spending cuts or the deficit. The government is run inefficiently and pays for plenty of unnecessary stuff. I agree with you there, but this discussion is about the merits of a specific tax policy. All I am arguing is that the consequences of this specific policy are being blown out of proportion.
How is it ironic? Instead of milking the same cow how about we make the income tax about income and not incentivizing social policy.
A traditional IRA is a tax deferral, not a tax deduction. While your contributions to a traditional IRA consititute a deduction in the period that the contribution is made, once you start to draw on it, the money is taxed. Whereas, if you have a house, you will never have to pay taxes on the accumulated interest deductions and in fact, you get a pass on capital gains so long as you use them towards another home.
This is a preposterous idea. I’m no fan of Obama, but this seems ridiculous even for him. This sounds like something that would “accidentally” come out of Maxine Water’s mouth, not an actual/official proposal from the White House. I doubt there’s even much support for something like this from even his own base-particularly the moderate Dems.
1.) I don't have a problem with a cap on IRAs. IRAs were set up as a benefit system to encourage the middle-class to save money. Tax-free growth of retirement savings is a public policy benefit, not necessarily a fundamental right.
2.) I don't know where this 6.7% rule is coming from, but conservative retirement dictates 4% withdrawals. A $5 million cap, not a $3 million cap, would support a withdrawal rate of $200K, which was the number under discussion, IIRC.
3.) Frankly, I'd go with a $10 million cap, which would support $400K/year of retirement. If you can't be happy on $400K/year, you've got issues. And that's still a number that the guy down the street makes in middle America. He will be a lawyer or a doctor, but you will still waive at him
4.) What happens if taxpayers are responsible, save lots of money, and hit the cap? We need a very careful provision for the excess contributions to "spill" out of the IRA.
5.) We should also limit contributions as the cap is approached to prevent people from gaming the system- contributing large amounts one year and hoping for a "spillout" a couple years later to shift income from year to year.
6.) I think people do consider the tax-free gains that have occurred inside of a Roth IRA or 401k "property". Excess withdrawals on those should be allowed tax-free.
But on its face, I don't have a problem changing the rule going forward. IRAs were always designed with limits in place to prevent the rich from socking away $100 million and letting it grow tax-deferred indefinitely- it's been that way since the 1970s when the system was developed. Reasonable limits on 401ks are consistent with public policy objectives, so long as we acknowledge that there's nothing wrong with a conservative 4% or 3.5% withdrawal rate supporting a $200K/year retirement income.
We are a capitalist country. We need to stay a capitalist country. Obama has done many things to make us less of a capitalist country. This is not one of those cases. This is a case of really clever accountants and retirement gamers trying to sneak around IRA contribution limits which were set as a matter of public policy. Maybe switching from a per year contribution cap to a total account size cap makes more sense.
I LOVE the idea of considering original intent with tax policy. In all seriousness, let's walk down the line and do that.
IP, I like your point #6, and my biggest qualm overall is that I still have a wet dream to put an investment with close to a zero basis into my IRA.
Never felt sorry, or would feel sorry, for the Romneys in this situation, but still find this arbitrary, and just another example our govt won't focus on the tough decisions they need to make.
I just think $10 million, inflation adjusted, is a more appropriate account maximum than $3 million.
If we were talking about raising the cap on social security taxes (currently about $110K) or raising taxes further on the rich, I'd have an issue. But correcting what I think even most tax accountants would agree is a misuse of a retirement savings vehicle is not a terrible thing.
You make some good points Illini and I generally agree with your premise, but I am still against this.
While a 10mm limit is "more reasonable" to me, I have a problem with any limit because it just gives the government more control and can be changed in the future because of bullshit politics. I also have a problem with everyone's point about "it is still in line with IRA policy goals...."; allowing a wealthy person to save millions for retirement has ZERO influence on how much a middle class individual saves. Mitt Romney having 50mm in his retirement account doesn't take money away from me. Also, all IRA money is taxed either going in or when it comes out...why do we need "new tax rules"?
Fair points - at least with $10 million, I don't envision a lot of middle class accounts hitting that threshold. Whereas with $3 mill I could see plenty of (ahem) frugal savers and prudent investors coming close.
As you and I both agree a typical saver is not going to hit the 3 million cap. There might be some brilliant or lucky guy who gets there with plain old saving and investing, but they will be few and far between. If you really don't want any chance of them hitting the cap then you could raise it a bit more. Those are not the poeple this legislation is targeting. This is targetting people who put their partnership carried interest into an IRA at zero or near zero basis. So no most of those people hitting the cap will not do so because of investing acumen they will do so because of a loophole in tax law that allows them to value carried interest at or near 0. The reason why only IRAs are being picked on is because that is the account where this strategy is used.
If only looked at from the context of a typical saver and investor then yes this does seem arbitrary and redundant, but those are not the only peopel using IRAs. It seems like this legislation is aimed at reducing the ability of people to take advantage of legal, but strangely low valuations of carried interest in their IRAs.
If anyone is interested in why a carried interst can be valued at zero go to this story in wsj and then click on the "unreported 2008 presentation" in the second paragraph. http://blogs.wsj.com/washwire/2012/08/24/a-clue-emerges-to-romneys-gift…
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