The news is out that President Obama is looking to introduce legislation to limit the value of retirement accounts to $3 million. So far, the claim is this targets IRAs, but it’s a simple matter for many of the big account holders to simply transfer from IRA to 401(k), so it would seem logical that once we see the full details, this limit will apply to all retirement accounts.
The news articles are suggesting this limit was a response to the fact that Mitt Romney amassed an incredible $100 million in his IRA. I spent a bit of time before the election writing about Romney and specifically in an article titled Romney’s Enormous IRA Balance – The Smoking Gun I spelled out the issues of how it’s unlikely the account grew to this value naturally.
I’m all in favor of Romney’s IRA getting taken apart, i.e. taxed. A current limit of $3 million will not affect the average Joe, take a look at these numbers. You can click the image to enlarge it).
The data is a bit old, but 2007 ended with the S&P just a bit lower than it is now, so for this discussion the chart is fine. We’re looking at median family net worth. For those in the top 10%, half have below $1.9 million, half higher. 5% of families have a net worth over $1.9 million. It’s not too great a stretch to assume that to specify $3M in one’s IRA or 401(k) is some smaller fraction, likely the 1%ers or even a bit fewer. So why all the fuss?
Very simple, remember the AMT. Specifically, I mean you should remember the origin of the AMT. It was created as part of the Tax Reform Act of 1969 intending to target the 155 high income households that managed to pay zero Federal Tax. By 2008, 4% of filers were subject to AMT with 27% of these households having incomes under $200K. Today, $3M still seems like a large number, but inflation has a way of eating away at the dollar. An inflation calculator showed that in my lifetime (50 years) the dollar has eroded by a factor of 7.5X. In other words, something costing $100 in 1962 would cost $750 today. That $3 million IRA cap will feel like $400,000 50 years from now. I know, we can’t forecast a few years out, 5 decades seems crazy. For me, it’s a ‘horse out of the barn’ event. $3M now, but easily adjusted down at congress’ whim.