Using a complex formula, President Obama's 2014 proposed budget establishes a beachhead for taxation of previously tax-protected retirement benefits. Under the proposal, an individual's total lifetime balance across all retirement accounts (pension, profit-sharing, 401(k), IRA) will be limited to the amount necessary to purchase a life annuity generating an annual payment of $205,000 for a 62 year old. Calculating the limit using existing assumptions yields a balance limit of $3.4 million. Many retirement plan experts were surprised at the proposal for the following reasons:
- Complex calculation. The lifetime balance limit calculation appears to be fairly complex - not something an individual might take-on without the help of an accountant or actuary. Also, a calculation for someone near the limit could yield a result above or below it in different years based upon changing investment performance, interest rates, government limits on other benefits, etc. More importantly, the accuracy of projected calculations for individuals who wish to maximize their retirement benefits throughout their lifetimes could be limited due to the number of assumptions required.
- Not much of a revenue generator. Most experts feel that the true objective of this proposal is to establish a beachhead from which more aggressive taxation/benefit limitation may spawn. Observers point to the existing small number of individuals (.03% of retirement account holders) who have account balances that would trigger limitation.
- Other low-hanging fruit. Many observers are puzzled as to why more easily understood and previously discussed revenue raising strategies were not proposed. For example, there has been significant prior discussion about limiting the collection of Social Security and Medicare benefits based upon means testing. Also the subject of prior discussions, and thought to be a significant revenue raiser, is the application of the Social Security payroll tax to all earned income.
Unfortunately, this new attack on retirement benefits breaches an important safeguard for the first time, setting a precedent for additional taxation or limitation of previously tax-protected retirement benefits.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). He may be contacted at
