A budget deficit-cutting proposal from President Obama released today that calls for capping the value of individual retirement accounts at $3 million would significantly impact the growth of the retirement market in coming years, according to an analysis by Employee Benefit Research Institute.
Robert Smith, president of the National Association of Insurance and Financial Advisors, added another concern.
“The current tax code already has contribution limits to retirement savings programs, including IRAs, and, therefore, limits on account balances is detrimental to conscientious taxpayers who have made current sacrifices for future security.”
The proposal was released this morning.
The budget also contains chestnuts from past administration budgets that would impose de facto tax hikes on other industry products, but these are seen as having little likelihood of becoming law, according to officials at Washington Analysis, which advises institutional investors and hedge funds.
One proposal would subject the dividend received deduction (DRD) for general account dividends to the same flat proration percentage that applies to nonlife companies under current law (15 percent).
Another would base the DRD for separate account dividends on the proration of reserves to total assets of the account.
Officials of the American Council of Life Insurers would only say regarding the cap proposal that, “we’re examining the cap proposal now.”
But, NAIFA’s Smith warned that, “Planning for your future financial security is about managing risks and needs, and NAIFA members help their clients consider a range of factors when planning for retirement, including life’s unexpected needs.
“There should be no limit on the need that life insurance and annuities will address, so how can you limit the vehicles you use (such as IRAs) to address those needs?” Smith asked.
Smith “encouraged” Congress to carefully consider the negative consequences of arbitrary caps. “What may seem to be too much protection for some, will inevitably be too little protection for others,” he said.
The potential impact of the retirement cap proposal was laid out in stark detail by EBRI.
The data implied that the proposal, if enacted, would snowball over time on growth of the U.S. retirement savings industry.
Specifically, EBRI said that based on an analysis of its database, that as of 2011, just 0.03 percent of the approximately 20.6 million accounts had more than $3 million in assets.
About 0.06 percent of the total account holders (some individuals own more than one account), and about 0.11 percent of account holders who are age 60 or older surpass the threshold, EBRI officials said.
However, based on inflation, 2.2 percent of those currently ages 26–35 will be affected by the $3 million cap (adjusted for inflation), compared with just 0.1 percent of those ages 56–65.
And, at the $2.2 million level cited above, 6.0 percent of younger retirement savers would be affected by age 65, compared with 0.3 percent of those ages 56–65, EBRI said.
Additionally, when age adjustments are factored into asset allocation, 4.2 percent of those aged 26–35 would be affected by a $2.2 million cap, EBRI said.