Press Room: Tax Release

April 30, 2013

The Squeeze on Retirement Benefits

One of the provisions in the Obama Administration’s 2014 budget proposal is to limit the amount that may be accumulated in all tax-favored retirement programs in which an individual participates after December 31, 2013.  Tax-favored retirement programs include IRAs (both traditional and Roth), qualified retirement plans, Sec. 403(b) arrangements, and Sec. 457(b) programs maintained by government entities.

Individuals and their employers would be prohibited from adding to assets in retirement programs once the value of the assets exceeds a threshold.  This threshold would be the amount necessary to provide the maximum annual benefit permitted under a tax-qualified defined benefit plan (currently $205,000 per year).  For an individual age 62, the amount in 2013 would be approximately $3.4 million.  For an individual age 50, the 2013 threshold would be approximately $1.9 million.

Under the proposal, once the amount accumulated in all retirement programs in which an individual participates exceeds the threshold, no further contributions or benefit accruals will be permitted.  However, the accounts may continue to grow with investment earnings and gains.

If in a subsequent calendar year the accumulated amounts are less than the maximum threshold, then additional contributions and benefit accruals can be made again.

Contributions and benefit accruals made after the maximum threshold has been exceeded will be taxable to the individual in such year.  Such excess amount would have to be withdrawn within a specific grace period.  If the excess amounts are not withdrawn during the grace period, then the excess amounts will again be subject to taxation when they are distributed at a later date.

To implement the limit, plan sponsors and IRA trustees will be required to report the value of an individual’s account balance as of the end of each calendar year as well as report the amount of any contributions or benefit accruals earned for the calendar year.