A New IRA Withdrawal Limit Proposal

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Capping Tax-Advantaged Retirement Plans?

By Rick Kahler MS CFP® ChFC CCIM http://www.KahlerFinancial.com

Rick Kahler CFP“Max out your retirement plans every year” has long been standard advice I’ve given to working adults, and all medical professionals, who want to secure a reliable income when they retire.

Individual Retirement Accounts (IRAs), along with 401(k), 403(b), and profit sharing plans offered by some employers, are among the most accessible ways for middle-class workers to provide for retirement and build wealth.

If a proposal in President Obama’s budget plan is approved by Congress, however, retirement plans may no longer be the first and best stop along the road to financial independence.

The New Proposal

The proposal would limit a person’s total withdrawals from all tax-advantaged retirement plans to the amount it would cost to purchase an immediate annuity paying $205,000 a year. And, it appears to not be indexed for inflation. The articles I’ve read and my own calculations suggest this would mean capping retirement accounts at around $3 million.

From the sketchy details available so far, the proposal appears to target traditional IRAs and other tax-deferred retirement plans. Contributions to these accounts are made with pre-tax dollars, and the earnings in the account are not taxed until they are withdrawn.

Since 58% of Americans don’t have any retirement plan, my guess is they will pay little attention to this proposal. Saving $3 million dollars seems well out of reach. While that may be true in today’s dollars, it most likely will not be true in future dollars.

If inflation over the next 40 years matches that of the past 40, a $3,000,000 IRA in 2053 will be equal to $575,000 today. If today’s 25-year-old, retiring then, wanted to be sure the money would last another 40 years, the IRA would provide an income equivalent to about $1,500 a month.

Tax-Advantaged Retirement Plans

Even in today’s dollars, the $3 million maximum isn’t as unreachable as it may seem. Employees can currently contribute a maximum of $5,500 per year ($6,500 for those 50 and older) to Roth or traditional IRAs. Small business owners and the self-employed may have SIMPLE (savings incentive match plan for employees) or SEP (simplified employee pension) IRAs. The maximum annual contribution is currently $17,000 for a SIMPLE and $51,000 for a SEP. A self-employed plumber, business owner, or doctor who was a conscientious saver with a diversified portfolio could certainly accumulate $3 million over a lifetime.

Or, suppose the wife of a small business owner, or doctor, was a self-employed counselor with her own SEP plan. If he died at age 58 and she inherited his IRA, the combined totals could easily put her over the $3 million cap.


MD Retirement planning

Unclear Options

It isn’t clear how the proposal would equate the withdrawal rate with the cap. One possibility would be to raise the required minimum distribution amount, which would erode the value of an IRA more quickly.

Another option would be to penalize excess accumulations with a hefty tax of 40% or more. Of course, the President could follow in Argentina’s footsteps and just confiscate any amount over the cap.

Any of these would add to the diminution of retirement plans as a vehicle for income during retirement.

The Caveat

The proposal includes this statement:

“But, under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”


Apparently we, as individual citizens, are not considered capable of defining “reasonable levels” of retirement saving for ourselves. The real goal of this plan appears to be wealth distribution, instead of encouraging more Americans to save and provide for their own retirement.


If this proposal is passed, retirement plans will play a much smaller role in many middle class Americans’ golden years.

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3 Responses

  1. Are U a Savvy IRA Manager?

    When it comes to retirement planning, most of the focus is placed on 401(k)s and 403(b)s.


    The reality is that individual retirement accounts represent the largest share of America’s savings. And, this reality is not good.

    Ann Miller RN MHA


  2. 5 reasons 401k’s trump Roths

    With all the retirement savings options out there, it’s sometimes difficult to know which is best for you. So, if you’re comparing Roth IRAs and 401k’s, read on.




  3. IRA Withdrawals

    Last year I reached a significant milestone—age 59 ½, old enough to withdraw money from my IRA’s with no penalty.

    While I experienced this milestone as bittersweet, it did remind me of the importance of timing when it comes to taking money out of retirement accounts. Making withdrawals at the wrong time can have serious tax consequences.

    The basic concept of retirement accounts such as IRA’s and 401(k)s is simple enough: while you’re working you put money in, and when you retire you take money out. To get the maximum benefit from your retirement income, however, it’s wise to have a withdrawal strategy.

    The standard approach to withdrawing retirement funds usually follows this progression:

    1. First, if you are over age 70 ½, take any required minimum distributions (RMD’s) from your traditional IRA or 401(k) retirement accounts.

    2. Second (or first, if you’re under 70 ½), spend down funds from any investment portfolio that are not part of a qualified retirement plan or tax deferred annuity. The reason for tapping these accounts first is that the total tax liability will be much less than funds withdrawn from a retirement account or annuity.

    3. Next, start withdrawing from tax-deferred accounts like variable or fixed annuities or retirement plans, like a traditional IRA or 401(k), where the gains are taxable as ordinary income.

    4. Finally, withdraw from tax-free accounts like Roth IRA’s and 401(k)s.

    This strategy is a good starting point, but a more nuanced plan may help you make the most of your retirement income. Some factors to consider include: your projected spending needs at various stages of retirement, your total projected income and tax liability, whether withdrawals from various retirement accounts are taxable, and how much you expect your income to fluctuate over time.

    It is important to pay attention to your tax bracket on a year-by-year basis. For example, suppose Liz and Frank expect their total 2015 taxable income from Social Security and investments to be just under $60,000. This puts them in the 15% bracket, where the top limit for 2015 is $74,900. It may make sense to fill up that bracket by selling appreciated assets with a $15,000 gain (the capital gain tax would be 0%) or withdrawing another $15,000 from a traditional IRA and paying ordinary income taxes at the 15% rate.

    This would especially be a good idea if Frank and Liz expect their taxable income to go up in 2016. One of them might have to begin required withdrawals from a pension plan, or they might have income from selling their home or a small business.

    On the other hand, if they were in a higher tax bracket today and expected their taxable income to go down significantly in 2016, they would want to wait until then to take money out of the traditional IRA.

    Another strategy for a year when you’re in a lower tax bracket is to convert some of the funds in a traditional IRA to a Roth IRA. You pay taxes on the withdrawal at the lower rate, and the future gains in the Roth are not taxed.

    These are very simplified and generic examples, of course. Any withdrawal strategy needs to be designed for your specific needs, preferably with the help of a tax advisor. But, the key is to plan ahead. It’s necessary to do a trial balance and tax estimate toward the end of the year so you have time to make withdrawals or conversions.

    Building retirement savings requires us to think strategically and consider the future. To get the most out of those savings, we need to do the same.

    Rick Kahler MS CFP®


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