A new budget proposal from the Obama administration brings back some themes from the past; namely, taxing “excess” accumulations (or more specifically, “excess” distributions) from IRA’s and other retirement accounts. Believe it or not, this idea has been on the books previously, as part of the Tax Reform Act of 1986. It was repealed a few years later upon the origination of what we now know as Roth IRA’s.
Even if the most recent proposal never finds its way into law, the concept alone sends a chilling signal to savers. Save too much, invest too well and Uncle Sam will come looking for you. From a longer term, big picture perspective, this inserts serious question marks behind popular strategies like Roth IRA’s. Will the government uphold their promise not to tax these accumulations in the future, even if the amounts are deemed “too large”?
From a revenue-hungry budget writer’s perspective, it is clear why retirement plan accounts attract their view. According to Federal Reserve data, retirement plan account balances are the largest asset category among U.S. households. That is where the money is – plain and simple.
For many years we have counseled clients that it is important to maintain distinct “buckets” of assets in both tax deferred and taxable account arrangements. Too often, short sighted clients resist this advice because it may not “optimize” their current year tax situation. However, if someone has almost all of their investments in retirement accounts and little elsewhere, proposals such as this one can create significant problems.