Obama to cap tax-preferred retirement accts to $3MM

[ERICOPOLY]

I can't tell what they are planning.

 

I pay a $1.5m larger tax bill next year (that's not what I'm forced to withdraw, that's what my income tax bill will be) if it's the worst case.

 

Or I pay a $0 tax bill if it's the best case (contribution limits only).

 

It's a tragedy for the tax payer though -- I'm pretty sure I can beat the cost at which the government borrows money.  All of the gains I make in the Roth IRA going forward would otherwise the subject to the 40% estate tax.  Same with Mitt Romney.

 

It's a public private partnership.  Obama is liquidating the largest partnerships that the US Treasury has an interest in.  These tend to be the ones with investors who seem to be relatively good (or else the account just magically became large?).

 

So the tax burden of the general tax-paying public just went up.  Now that's assuming I take a big chunk of the money and use it to start reducing my taxable estate (gifts for kids crummy trusts').  And that's exactly what I intend to do.

 

But yes, I'll get rich slower.  That might make Obama satisfied, but it means more tax burden for the general public so his is a hollow victory.

 

[matjone]

I don't know if we can make the decision whether or not to tax based on whether we can borrow cheaper than a stock market return.  I think that is pretty much always the case.  If your money truly goes to pre-school education I could appreciate the argument that that is better than waiting for a bigger pot down the road.

 

Not saying I disagree with you on the main point, though.  A deal is a deal and if you can't be counted on to keep your end of your agreements then eventually people aren't going to trust you.

 

My personal feeling is that the best thing would be to tilt it so that we get as much funding as possible from estate taxes rather than income and cap gains taxes.  Let people get as rich as they want but when you die it either goes to charity or gets taxed.  Keeping people motivated to work, save, and invest is good but I think there are better things to do with it once you've made it than trying to build a family dynasty.

[ERICOPOLY]

but I think there are better things to do with it once you've made it than trying to build a family dynasty.

 

Actually, this country suffers from not enough people doing what they want to do.  We wind up taking jobs that we don't like, simply because they pay better.  See Munger's comments on the engineers working at hedge funds.

 

So I have the idea of just providing matching income to my children if they pursue their goals.  So if they want to pursue a career in teaching, they'll get a matching income (up to a certain percentage) from the trust.

 

That way society benefits from one more passionate science teacher and one less useless money fund manager.

 

Of course, I could just fund teachers directly but I have a biological itch to scratch (looking after my own).  But I can do that I think while society is also benefitting from them pursuing their dreams.

 

The criteria for getting any money is earned income.  Gambling winnings not included.

 

 

 

 

 

 

[ERICOPOLY]

I don't know if we can make the decision whether or not to tax based on whether we can borrow cheaper than a stock market return.

 

That's not quite what we're doing.

 

We're pulling the flowers...  I'm not going to say to water the weeds until I know where that specific money is going, but I do know for sure he's pulling the flowers.

 

Only the best performing accounts are being culled.

 

It's not like I'm some tycoon who stashed millions of pre-tax earnings aside.  I made 30,000% in seven years (all the gains came in the last 7). 

 

I put 12,000 aside on average each year just like plenty of others could have done in the middle class.

 

Obama says he is doing this for the middle class.

 

But taking away hope?  This is one of the only avenues for class mobility -- passive investing to get yourself out of your day job.

 

And by getting myself out of the job at age 34, that enabled another person to take my job.  Else, he'd be unemployed and on benefits.

 

I have benefitted that guy enormously.

 

[ERICOPOLY]

This is all so silly anyhow.  There is no limit on variable annuities contributions.  So why go after IRAs? 

 

Here, for example, is Vanguard's variable annuities page:

 

https://investor.vanguard.com/what-we-offer/annuities/save-for-retirement

 

Notice the words save for retirement in that URL?

 

How deferred annuities work

A deferred annuity can be a smart way to build extra savings for retirement.

 

You can put more money away than you can with other retirement accounts.

In most instances, your earnings can accumulate longer because there are no requirements for withdrawals. Note: Required minimum distributions could still apply if you roll over assets from a qualified retirement plan or IRA.

You can add to your deferred annuity and withdraw assets from it at any time.*

You can convert the annuity assets into periodic payments—or simply make withdrawals as you wish.

 

 

And then look at all the investment options -- doesn't this sound almost exactly like an IRA?:

 

https://personal.vanguard.com/us/funds/annuities/variable

 

 

 

[ERICOPOLY]

It looks like IRAs can be rolled into variable annuities -- hopefully this is a loophole that can be exploited:

 

https://investor.vanguard.com/what-we-offer/annuities/save-for-retirement

 

quoting:

In most instances, your earnings can accumulate longer because there are no requirements for withdrawals. Note: Required minimum distributions could still apply if you roll over assets from a qualified retirement plan or IRA.

 

 

[Guest valueInv]

When God closes one loophole, he opens another one. :o

[Guest valueInv]

You've got company:

 

http://www.bloomberg.com/news/2013-04-11/john-paulson-to-start-fund-to-reduce-clients-tax-bills.html

[ERICOPOLY]

You've got company:

 

http://www.bloomberg.com/news/2013-04-11/john-paulson-to-start-fund-to-reduce-clients-tax-bills.html

 

He should start a holding company, not a fund.

 

0% tax by owning Berkshire till death (which is what you do if you are a billionaire, because you aren't going to spend the money).  Owners of Berkshire enjoy dividends from equities taxed at 14.5% rate, dividends from subsidiaries taxed at 0% rate, and capital gains taxed at 28% (under Obama's proposal).

 

I know you are thinking that 28% on capital gains is no sweet deal, but considering that California has a 13% capital gains tax rate on top of the 20% Federal capital gains tax rate as well as the roughly 5% Obamacare/medicare tax, then 28% seems like a pretty sweet deal after all!

 

[onyx1]

"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."

http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html?mod=WSJ_hp_mostpop_read

 

Here's more hope.  Looks like WSJ may have confirmed this with someone at the Treasury.

[Guest valueInv]

You've got company:

 

http://www.bloomberg.com/news/2013-04-11/john-paulson-to-start-fund-to-reduce-clients-tax-bills.html

 

He should start a holding company, not a fund.

 

0% tax by owning Berkshire till death (which is what you do if you are a billionaire, because you aren't going to spend the money).  Owners of Berkshire enjoy dividends from equities taxed at 14.5% rate, dividends from subsidiaries taxed at 0% rate, and capital gains taxed at 28% (under Obama's proposal).

 

I know you are thinking that 28% on capital gains is no sweet deal, but considering that California has a 13% capital gains tax rate on top of the 20% Federal capital gains tax rate as well as the roughly 5% Obamacare/medicare tax, then 28% seems like a pretty sweet deal after all!

 

Trust me, I'm  waiting to double my Berk holdings. I consider not buying enough Berk to be one of my bigger investing mistakes.

[ERICOPOLY]

"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."

http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html?mod=WSJ_hp_mostpop_read

 

Here's more hope.  Looks like WSJ may have confirmed this with someone at the Treasury.

 

Or perhaps the Treasury department has it's proposal, but perhaps Obama is proposing something that goes beyond what the Treasury proposes.  Maybe that's because the White House is the political arm of the Treasury, and first Obama wants to scare you (to get you anchored to communism), and then in a "grand bargain" reduce his plan down to merely the Treasury's proposal.

 

 

[rkbabang]

From: Taxed for Life:

 

"The least of the problems with the income tax is that it takes your money. The really big problem is that the income tax takes your life. It gives the government direct access to the things you own and sets up the political/bureaucratic sector to be the final arbiter of what you can and cannot consider to be yours..."

[jay21]

You've got company:

 

http://www.bloomberg.com/news/2013-04-11/john-paulson-to-start-fund-to-reduce-clients-tax-bills.html

 

He should start a holding company, not a fund.

 

0% tax by owning Berkshire till death (which is what you do if you are a billionaire, because you aren't going to spend the money).  Owners of Berkshire enjoy dividends from equities taxed at 14.5% rate, dividends from subsidiaries taxed at 0% rate, and capital gains taxed at 28% (under Obama's proposal).

 

I know you are thinking that 28% on capital gains is no sweet deal, but considering that California has a 13% capital gains tax rate on top of the 20% Federal capital gains tax rate as well as the roughly 5% Obamacare/medicare tax, then 28% seems like a pretty sweet deal after all!

 

Trust me, I'm  waiting to double my Berk holdings. I consider not buying enough Berk to be one of my bigger investing mistakes.

 

What's stopping you?

[Guest valueInv]

A better price.

[RichardGibbons]

From: Taxed for Life:

 

"The least of the problems with the income tax is that it takes your money. The really big problem is that the income tax takes your life. It gives the government direct access to the things you own and sets up the political/bureaucratic sector to be the final arbiter of what you can and cannot consider to be yours..."

 

I don't get it.  What's the alternative to government being the final arbiter of what you can and can't consider to be yours?  I think either society as a whole agrees on what ownership means (society = government) or you only own what you can protect from other people taking (which I think almost everyone would hate). 

 

Am I missing something?  Or is it just the fantasy that if we abolish government, everyone will magically adhere to some moral code that includes a similar notion of what ownership means?

[ERICOPOLY]

Interesting point:

 

Would public employees face the same upper limit on their pensions? If they already have reached the $205,000 limit, could we stop making contributions for them? Or could they stop getting pension raises?

 

What if you have a pension and other tax-deferred accounts? Who is responsible for aggregating the information? Who will pay that administrative cost?

 

http://blogs.wsj.com/totalreturn/2013/04/15/the-ira-cap-devil-is-in-details/?KEYWORDS=IRA

[bookie71]

Way back in the dark ages (in the 80's) the government tried capping at a certain amount.  All I remember was there was a "grandfather election" that had to be attached to the tax returns.

http://news.google.com/newspapers?nid=860&dat=19890321&id=vqJUAAAAIBAJ&sjid=G48DAAAAIBAJ&pg=3052,8623529

[stahleyp]

http://finance.fortune.cnn.com/2013/05/01/obama-retirement-package/

 

"Second, I can't get past Obama wanting to limit savers to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. (My calculations are at the bottom of this piece.)"

[ERICOPOLY]

http://finance.fortune.cnn.com/2013/05/01/obama-retirement-package/

 

"Second, I can't get past Obama wanting to limit savers to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. (My calculations are at the bottom of this piece.)"

 

quoting:

Limiting tax-favored retirement assets of people who have saved all their lives to about half of what taxpayers will give Obama for eight years in office is just wrong. End of story.

 

[ERICOPOLY]

Update from his 2015 budget proposal.

 

Obama doesn't seem intent to make me withdraw anything, but rather to limit me from contributing anything further.

 

Oh, and by the way... that means you can't contribute anything if you are 40 and your accounts amount to $1m in total!

 

http://money.cnn.com/2014/03/04/pf/taxes/obama-budget-taxes/index.html?iid=HP_LN

Limit savers' combined balance across tax-preferred accounts: The president wants to prohibit contributions to tax-advantaged retirement accounts once a person's combined balance exceeds a certain level. Such accounts include IRAs and 401(k)s.

The cap on the combined balance would be based on a saver's age and would vary over time based on factors such as inflation and interest rates. It also would be determined by what it takes to buy a "maximum benefit" annuity at age 62, with a 100% survivor benefit for one's spouse. In 2013, a maximum benefit annuity would have provided $205,000 a year.

Last year, for instance, the cap would have been $3.4 million for someone who was 62, but just $1 million for someone who was 40, according to a Tax Policy Center report.

[fareastwarriors]

I keep hearing Obama's budget is dead on arrival.

 

What is the chance of this legislation (Limit savers' combined balance across tax-preferred accounts) passing?

 

[ERICOPOLY]

I keep hearing Obama's budget is dead on arrival.

 

What is the chance of this legislation (Limit savers' combined balance across tax-preferred accounts) passing?

 

It doesn't limit the combined balances.  It just limits your ability to contribute more funds to the accounts after the combined value hits the threshold.  This is more specific wording compared to last years' proposal where he seemingly talked about limiting the balances.

 

However, even with his new proposal it appears you can still contribute limitless amounts to variable annuities.  In that regard his new proposal still makes absolutely no sense.  He should just limit pre-tax contributions if that's what he's really after.

 

 

[Otsog]

Are we supposed to be shocked that someone at the government actually used a calculator and figured out how much these accounts were going to cost the government?

 

 

Canadians, this will happen to the TFSA one day. 

[DoddDisciple]

How are they going to keep track of this for people who hold tax-preferred retirement accounts at multiple brokers? What about ROTH vs traditional IRAs?

 

Are they going to have similar limits on the absolutely terrible myRA plans they are rolling out?