Close Close

Financial Planning > Tax Planning

Wealth Management Whac-A-Mole

Your article was successfully shared with the contacts you provided.

Financial advisors just won’t stay down.

The Obama Administration thinks $3.4 million is more than enough for any one individual to accumulate tax free, and said as much in its recent budget proposal. The reasoning behind that is “a worker’s total account balance would be limited to the amount needed by a 62-year-old to buy an annuity generating an annual payment of $205,000,” according to The Wall Street Journal’s Kelly Greene.

The response was predictable outrage, most of which centered on the very obvious point that with entitlement spending already out of control, a top-heavy generational issue with boomers in retirement, and images of a broke Spain and burning Greece, is a disincentive to save really the best course of action?

“Curbing the growth of retirement plans in a nation where 91% have less than $100k saved is insanely ignorant,” financial planner Rick Kahler tweeted. 

Unintended consequences are rarely considered when politicians are looking to do good. I hope further reflection will result in this proposal going the same way as the ill-conceived 1099 rule for purchases over $600—which is to say dropped and forgotten.

And let’s not forget the options backdating scandals that grew as a direct result from do-gooder attempts to limit CEO pay.

But unintended consequences cut both ways, and I was heartened to see advisors already getting to work to use the proposed cap appropriately to their clients’ advantages. Social media blew up with back-and-forth over possible estate planning strategies it might afford.

One strategy is “advising your children to fund Roth IRA accounts, on which tax is paid up front and withdrawals are generally tax-free after meeting holding requirements, early in life till they reach the cap, giving their investments more time to grow,” WSJ’s Greene reported.

A second is setting up a Roth IRA trust to follow another provision of the budget proposal: “emptying inherited accounts within five years of the IRA owner’s death. The IRA could be emptied into the trust, and then you could still require your heirs to take withdrawals over a longer period of time, if you’d rather them do that than be hit with a one-time windfall.”

It’s early in the analysis of the proposal and much will likely change, but for those who fear for the future of the industry, take heart–we’ll always have the government’s (unintended) help.