President Obama, in his proposed budget for 2014, has unveiled changes on retirement plans.
Here is a brief overview of the three most controversial items on his wish list:
1) Automatic Enrollment In IRAs
Employers in business for at least two years with more than 10 employees would be required to offer automatic enrollment in IRAs to employees. Employees would contribute through payroll deduction.
The administration proposes this to help solve the retirement crisis in which only one in fifty workers are making plans for retirement [according to the Employee Benefit Research Institute (EBRI)].
To help defray costs, small employers would get a tax credit. The proposed formula is $500 the first year, $250 for the next, plus an added $25 per worker over six years.
2) Cap On Retirement Savings
Individuals would be prohibited from contributing to retirement accounts once a cap on the cumulative savings is reached. The proposed cap is $3.4 million.
How would it work? Say a taxpayer has $2.5 million in a 401(k) and $800,000 in an IRA. The total cumulative savings is $3.3 million. The taxpayer can only contribute another $100,000 in total in his/her lifetime to either plan.
EBRI states only .0041 of 401(k) account holders in 2012 and only .06 of IRA account holders in 2011 would be affected by the cap. The White House estimates that the caps would generate $9 billion over ten years.
3) Eliminating Stretch IRAs
The stretch IRA, which allows beneficiaries to stretch the proceeds from an inherited IRA over the life expectancy of the beneficiary, would be eliminated. Instead, most beneficiaries would be required to empty (that is, take full distribution) of an inherited IRA by the fifth year after the death of the original owner.
The rationale, according to the Treasury Department, would be to eliminate a tax preference never intended by Congress. IRAs were never intended to exist beyond the lifetime of the original retiree. Instead, this tax preference creates a tax-favored inheritance that lasts another lifetime.
These proposals are ones to watch. If passed, it will have a major impact on retirement planning.
John J. Kasperek, EA, the author, has ran his own practice for over 25 years and enjoys passing on his expertise to the public.