President Obama recently proposed a cap on individual retirement accounts at $3 million, saying that amount is sufficient to fund a reasonable retirement while raising revenue for the Treasury. Many people were upset by this proposal, and while I think it has little to no chance of passing, it might be inevitable that a similar plan will become law in the future. Does this increase the need for after-tax investing?
The purpose of tax-advantage retirement accounts (401k, IRA, etc) is to encourage individuals to put away money for their future. We already have significant restrictions on contributions, income limits, withdrawals, etc, so to me this seems like a logical next step, although this specific proposal seems more about politics than actual revenue, since the President estimates it will raise only $9 billion over a 10-year period, hardly a significant number.
However, this is significant for average Americans even if you don’t believe you will ever hit $3 million in retirement savings. Many small business owners operate SEP-IRA programs for themselves and employees. The rules basically say, the business owner can contribute up to ~$50k a year into the account if the employees receive a 20% of salary contribution from the company. In these situations, if a business owner approaches the $3 million level in his/her own account, there is no incentive, in fact there might be a penalty for continuing the program. This ultimately hurts regular savers, even though the intent it limit upper-income earners from shielding too many assets from immediate taxation.
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