Re-Visioning Retirement Planning?

President Obama has recently provided us with a peek into his vision for retirement savings he hopes to embed in the tax code. This, of course, can be found in the White House’s preliminary budget proposal, which will be volleyed about the halls of Washington over the coming months in an effort to compromise. I think it’s important to take a look at some of the proposals because of policy vision it provides, and how that vision could affect current financial plans in the future.

Here are 3 proposals within the budget and the likely effects on your financial plan:

SAVINGS CAP 

A per person savings cap would be established, which would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $205,000 a year beginning when clients reach age 62. Confused yet? The initial formula would set the current cap at $3.4 million. This means that additional contributions to tax-favored retirement savings plans like IRAs & 401ks would not be allowed once this cap is hit.

If people determine that their annual retirement expense needs will exceed what the annual withdrawal from the capped account will be, then they will need to find different ways to save for retirement outside of deferred and tax-preferenced accounts.

EMPTYING INHERITED IRAs 

Right now, due to “stretch” IRA provisions, inherited IRAs (non-spouse) can be managed, withdrawn, and taxed over the life of the inheritor—basically allowing an inheritied retirement savings to retain its tax preferenced status over the life of the inheritor. This proposal would require to withdraw the savings in an inherited IRA by the end of the 5th tax year after the year of the original owner’s death.

This could be a big development as most people’s estate plan has considered the stretch IRA feature for their beneficiaries. This could mean that 20% of the account would need to be withdrawn per year as soon as the inheritor establishes the inherited IRA. If that person is in the height of their earning years, this withdrawal could be taxed at a very high tax bracket.

MANDATORY IRAs 

This proposal is aimed at closing the retirement savings gap that we are facing in the US. It requires employers with a certain number of employees to provide automatic enrollment in IRAs. If the employee does not make an election to contribute to the account, an automatic 3% of salary would be deferred (unless an employee explicitly opts out).

 Ultimately this is a good thing, as it should encourage more consistent savings into retirement accounts. It could prove more onerous for business owners, as they would be required to set up a plan.