The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Tennessee is representative of a common question involving President Obama’s 2014 budget proposal and the proposed cap on retirement accumulations. The advisor asked:
“I’ve heard that Capitol Hill may be capping an individual’s retirement savings accumulations beginning next year to $3 million. Is this true and can you provide more details on the cap?”
Highlights of Discussion
• It is true the 2014 budget proposal contains a provision that, if enacted into law, would limit the total accrual of tax-favored retirement benefits for each person. However, the provision is a long way from becoming a reality and may not come to fruition at all. President Obama’s 2014 budget proposal is just that — a proposal, which kicks off the formal budget negotiation process with the House and Senate.
• As proposed, an individual would be required to limit his or her combined accumulations within tax-favored retirement arrangements such as IRAs, defined benefit pension plans, defined contribution plans, 401(k) plans, 403(b) plans and governmental 457(b) plans to $3.4 million.
• The $3.4 million amount is based on the amount needed to purchase a joint and 100% survivor annual lifetime annuity of $205,000 commencing at age 62. The $205,000 is the maximum annual benefit payable from a defined benefit plan in 2013. This amount is subject to changes based on cost-of-living adjustments (COLAs).
• The $3.4 million cap would be determined as of the end of a calendar year and would apply for the next calendar year.
• Plan sponsors, IRA trustees and custodians would be responsible for reporting account balances, contributions and accruals for the year.
• Once an individual’s combined account balance reaches the maximum permitted amount, he or she could not receive further contributions or accruals. The individual’s account balance could continue to grow based on investment gains and earnings.
• Contributions and accruals could resume under two scenarios. First, if the updated calculation of the equivalent annuity was less than the maximum annuity permitted, there would be room to make additional contributions. This would happen if the investment return for a year was less than the rate of return used in the actuarial equivalence calculation. Second, when the maximum defined benefit annuity level increases as a result of a COLA, the maximum permitted accumulation level would increase as well.
• What about excess amounts? If the individual contributed or accrued amounts in excess of the maximum limit, he or she would have a grace period to correct the excess amount by removing it and including it in taxable income for the year. If the individual did not correct the excess by the end of the grace period, then he or she would have to include the excess and attributable earnings in income when distributed — even if the excess is a return of basis (as would be the case in the return of Roth contributions).
Conclusion
Remember, the retirement accumulations cap is only proposed at this point. Stay tuned for further developments. Financial advisors who understand the importance of any potential changes to contribution and accrual limits set themselves apart from the average advisor and are better positioned to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
