Obama proposes curbs to retirement-savings tax incentives for wealthy, heirs

The measures, which affect 401(k) and IRA limits and beneficiary withdrawals, have been proposed in previous budgets to no avail, but still worry financial industry groups

Feb 10, 2016 @ 1:59 pm

By Mark Schoeff Jr.

President Barack Obama has returned to a familiar soundtrack when it comes to curbing tax incentives for retirement savings, and interest groups want to limit its air play on Capitol Hill.

In the fiscal 2017 budget proposal the president sent to lawmakers Tuesday, Mr. Obama revived an idea that has appeared in previous budgets: limiting the amount of money that can build up in tax-favored retirement accounts.

Under the provision, a saver would not be able to make tax-deferred contributions to defined-contribution or individual retirement accounts if the account produces an annual benefit of more than $210,000.

The proposal would limit the maximum build-up permitted in the accounts to $3.4 million.

“Such accumulations can be considerably in excess of amounts needed to fund reasonable levels of consumption in retirement and are well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts,” the Treasury Department states in a document explaining tax proposals in the budget.

The administration also is targeting once again inherited IRAs as a source of tax revenue. There is a proposal in the budget to require almost anyone other than a spouse who inherits an IRA to take distributions over no more than five years. (Currently, if the plan participant or IRA owner dies before the required beginning date for distributions, the inheritor must beginning taking distributions within one year and be paid over their own life expectancy, or take all distributions within five years. If the owner dies on or after the beginning date for distributions, the heir must take distributions over their own life expectancy.)

“The preferences were not created with the intent of providing tax preferences to the non-spouse heirs of individuals,” the Treasury document states.

Mr. Obama has offered these proposal in previous budgets, and they have stalled in Congress.

But the fact that he keeps returning to them has financial industry interest groups concerned. They say the proposals would undermine retirement saving at a time when Americans are not putting away enough money for their post-work lives.

If the retirement-savings limits are promoted by the White House, it could put them on the table as revenue provisions for an individual bill, or they could become part of broader tax reform.

“This is not the first time these provisions have appeared in the administration's budget, however, as discussions on comprehensive tax reform evolve, it is critical to reaffirm the importance of these incentives to millions of Americans working to save for retirement,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement.

Even if Mr. Obama's budget has no chance of passing in its original form, industry representatives are always looking ahead to the next battle.

“We need to remain vigilant to continue our outreach and education of members of Congress,” said Lee Covington, senior vice president and general counsel at the Insured Retirement Institute. “We're confident that these provisions won't gain traction — whether in the budget or other legislation.”

Jules Gaudreau, president of the National Association of Insurance and Financial Advisors, is watching for the inherited-IRA proposal as well as one that would make it easier for small employers to offer retirement plans to be at the center of some Capitol Hill activity.

“It's likely there will be hearings on specific portions, such as taxes and health reform proposals,” Mr. Gaudreau said in a statement. “Some of the specific proposals, such as the stretch IRA or the [multi-employer plan] proposals, may find their way into other legislation that moves later this year.”

[Correction: An earlier version of this story, when explaining the current requirements for those inheriting retirement assets from someone not yet taking distributions, didn't include the option of the inheritor taking distributions within one year and being paid over their own life expectancy.]

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