This week, President Obama unveiled the preliminary budget blueprint for 2014, which includes a limit on the size of your tax-deferred retirement savings. For most Americans, the cap is unrealistic — they can only fantasize about having to worry about reaching such a limit. But younger savers may be more concerned.
“The Budget would 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,” the budget plan states.
The rule is meant to prevent some wealthier Americans from accumulating an excessive level of savings under tax-sheltered accounts.
According to the Employee Benefit Research Institute’s IRA database, roughly 0.03 percent of 20.6 million accounts had more than $3 million in assets at the end of 2011. The EBRI also projects that its 401(k) database will record 0.0041 percent of 401(k) accounts with $3 million or more at the end of 2012.
However, those statistics separate the assets between the different retirement accounts. Obama’s retirement-savings limit would apply to the total combined assets in all tax-advantaged accounts.
Younger workers with a diligent savings mentality may be affected by the cap if they make substantial contributions to their IRAs and employer-sponsored retirement plans, such as a 401(k).
A 25-year-old who saves $10,723 per year will hit the $3-million cap at age 65 if his retirement portfolio experiences an optimistic 8-percent average annual return. (Use our savings calculator to project various scenarios.)
On a more modest 6-percent average annual return, he’d have to save $18,288 per year to hit the cap at age 65. While it may seem difficult, it is not entirely outside the realm of possibility. The contribution limits for IRAs and 401(k)’s in 2013 are $5,500 and $17,500 (not including employer match, if any), respectively.
Fortunately, this retirement savings cap is likely to increase with inflation, in the same way that retirement contribution limits do.
There has been no word on how the limit would be enforced and what happens to your money when your retirement savings exceeds the cap.
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