We continue our look at the proposed 2015 Government Budget, and today it’s one that is bound to impact people by surprise.

The proposal itself may seem well intended, at face value, it puts a limit on what one can accumulate in their retirement accounts. In light of the Mitt Romney $400M IRA, such proposals have gotten public approval. To be clear, it’s not the spirit of the proposal that I object to, but the math behind its implementation. Let me first offer the limits and how they will be calculated. First, an annual benefit of $210,000 has been deemed enough. For a single person with no deductions, he would clear about $160,000. This is top 10% or so, but not quite wealthy. The next step is to see that $3.2M at age 62 will buy an annuity which will return the $210K each year. That makes sense, but not everyone wants an annuity. $3.2M will provide $128,000 per year if we use the 4% withdrawal rule, and after tax, just under $100,000.

We are talking about age 62, and the proposed budget doesn’t go into detail, but a rate of return must be assumed to determine a present value. If we use 6%, a 32 year old will have a cap on his account of about $560K. Still a reasonable number, although you should keep in mind, the market isn’t consistent year after year. Million dollar 401(k) accounts dropped by half in the dotcom bubble in early 2000, and again in the bust of 2008. So, the employee of a high tech firm with a volatile stock can see years when he can’t contribute, and therefore cannot collect his company match, only to find a drop in value the next year that puts him below the limit. The limit is different for each person depending on their age, and will force a cumbersome set of calculations as multiple providers will need to report their year end balances for each participant.

Last, I see nothing in the proposal to distinguish between the calculations for a couple vs individual. This may be addressed in the final version of the budget or just left as individual limits, but either way, as it stands, the calculations are just this side of incomprehensible. And this doesn’t address the accounts that are already in the tens of millions, only the ability to deposit more money.

With the cap, does any amount above the cap have to be withdrawn and thus subject to early withdrawal penalties, or does it just prevent further contributions?