…exceeding $3 million in such accounts is not very difficult for an individual
Greg Mankiw suggests a part of the new budget proposed by President Obama affects 401k and IRA accounts. Some comment in general retirement accounts from AB starts here.
Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts. The details are not yet known, but I think we know enough to say that this is a terrible idea. A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes. Completely replacing our tax system with a better one is, however, hard. Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax. The use of these accounts should be encouraged, not discouraged.
By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal. Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA. If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.
Pro Growth Liberal notes another aspect of Greg Mankiw’s outlook:
Greg explains by noting some folks can readily put away $50,000 a year. The median worker, however, cannot. But there may be something else afoot here as Brian Beutler explains:
One way experts believe financial managers avoid the current annual contribution limit to IRAs is by using IRAs to participate in investments and assigning those investment interests a nominal value vastly below fair market.
Brian cites as an example some clever tax planning done by a chap named Mitt Romney.
Median household income, 2007-2011 $52,762
[What is Mankiw’s definition of “frugal” by the way?]
The last two planning projects I did involved professors with long tenure retiring from small colleges, and each was approaching $2M in a TIAA-CREF account.
$3M sounds like a lot, but not really.
We are not talking about preventing someone from saving more than 3 million dollars for retirement, we are just talking about putting a limit on how much they can hide from taxes. If I remember correctly Romney had just over 100 million dollars in his retirement account. Is it reasonable to let that much money escape taxation in an account intended to provide a supplement for Social Security? In whose world?
“Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA.”
I don’t understand why anyone would dignify this vapid statement. Yes, under current law, it is legal for a self-employed person to put away about $50K/yr. How many people are we talking about? How is this a guide to social policy? Why should we pay any attention to an idiot who would make such a dopy observation?
STR, I’m not sure an old TIAA-Cref account is a good example today. Back in the day, these retirement plans were lucrative. (I worked for a little short of 3 years for the University of Utah in the early 80s and, during this time, they contributed $11,000 to my 403(b) plan. I don’t think many plans today have these type of employer inputs. When I retire those years were worth $158K without my having ever moved the money. It began at a 50-50 allocation and never was reallocated. Of course TIAA interest rates were very high in the early 80s tranches.)
If I had continued to get this as my years and salary increased, I think I could have easily reached $3M. But employers didn’t continue that level of benefit rates.
So I don’t think you need to worry about the Professors of tomorrow unless the limits are not tied to inflation. I think one intent is to stop tax advantaged accounts from being another tax avoidance route for estate planning.
So a few largely hypothetical people could hit the cap under reasonable return assumptions, and a somewhat larger group could hit it if they got lucky. So what?
Why should we be subsidizing these folks’ retirements e en further, esoecially if doing so would leave open abusive tax shelters for the very rich?