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Uh-Oh first proposal to cap amounts in tax favored accounts
As near as I can tell from a brief bit of searching, Australia's "superannuation" system is a mix of public pensions (a la SS) and voluntary contributions (a la IRA/401K), though perhaps more investment oriented than our SS. The proposal appears to be to start taxing (at a still reduced rate of 15%) earnings in excess of $100K (AU$) per year on their plans. This seems somewhat analogous to the WH proposal to cap accounts at an amount sufficient to generate an annuity of $205K/year; that is, both are based not on size of account, but size of retirement income generated.
This AU proposal might be somewhat like taxing Roths (rather than imposing a strict cap), except that the money going into our Roths is fully taxed, while contributions to AU accounts get a tax break. (Top Australian ordinary income tax rate appears to be 45%, so contributions, though taxed, are taxed at much reduced rates).
There's there's also a proposal mentioned to tax the contributions at 30% - for those earning over $300K (AU$) - which would still be below the normal tax rate (but above the current 15% for contributions for all earners).
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Still need to know a lot more about the WH proposal. For example, is the cap on generated income based on nominal or after-tax amounts? If the former, then one can push the after-tax amount higher by doing Roth conversions. By paying the conversion taxes from money in the IRA (not normally recommended), the nominal size of the account would be reduced, but the after-tax value would remain the same (since the money's now post-tax).
This prop will have some soak-the-rich appeal. Average fella thinks $3 mil quite a bit. But - toss in some hot inflation and it could well be a pittance in a few decades. Obviously trying to cash in on public outrage over Mitt Romney's reported IRA. One observer attempts to calculate how that tax-sheltered fortune grew so large given annual contribution limits. One possible scenario reqires average compounded returns of around 24.5% over 36 years. http://www.bankers-anonymous.com/blog/the-curious-case-of-mitt-romney-and-the-up-to-100-million-ira/
Also - Recall Rono's advice in that thread to use a multi-legged stool approach for your investments.
Also - MSF has long advised that where possible one's more aggressive (growth-oriented) investments be outside tax shelters. (for somewhat different reasons).
Hey, "they" can make any of us rich and taxable by whatever means would fit. Not unlike the alternative minimum tax of 1968 which eventually (via inflation) trapped taxpayers into having to pay the tax in many future years; any other suitable plan for today could be organized. The easiest plan would be to re-value the $US. This plan would move many here at MFO into the wealthy bracket via the simple method of adding a "0" to the value of the currency. 1922 Germany had fun with this and more so with today's Zimbawee. The U.S., however, would be through legislation. Better yet, the Office of Management and Budget could do the 10-20 year calculations to help establish guidelines. Ya, right? Hell, no one can project more than 3 months into the future the way things are operated today. Don't forget the motto of the day/year for governments from the local to the federal........... "Shared pain". A raging rant is awaiting; but I must be back to my work. Take care, Catch
Reply to @hank: The $3M cap is predicated on the idea that this would buy a $205K/year annuity.
One has to believe that the $205,000 annual income limit isn't coming out of the clear blue. A likely source of this figure is Internal Revenue Code Section 415. This sets a limit of $160K, inflation adjusted, for income levels used in capping both defined benefit and defined contribution plans.
Ignoring all the complexity, the bottom line is that this annual income limit built into the tax code is inflation adjusted, and in 2013, it is $205,000. So it seems reasonable to assume (until we hear the details of the proposal) that the $205K is inflation adjusted. Thus the $3M cap is also inflation adjusted, and would not be a pittance in the future.
Let's not forget the legislation that lets them claim "inactive accounts". I thank FDA for its mention of this in their 2012 year-end summaries (IMHO every fund company who pretends to put "investors first" should be informing shareholders of this fact).
The big money grab is on. It will progress slowly at first; perhaps only in retrospect will you be surprised at how they've siphoned off your hard-earned savings.
You all knew that this was coming and you really need to plan for it. Of course they're going to try to raise revenue any and all ways possible. They have no choice. Note, that they will also have to cut benefits and break promises in any and all ways possible. Again, they have no choice. They have over $100T in unfunded liabilities and not even a combination of maximum politically viable tax increases and benefit reductions can cover the tab. That means that in addition to raising taxes and cutting benefits, the remainder will have to be monetized. There is no other option. That's what QE . . . nth is all about.
Now with all this said, they historically have pimped us from long range and I don't see this time being any different. By this I mean that they will grandfather everything so that no one is immediately impacted. This limits the howls of outrage because when you're 40 and they change the SS retirement ages to 67-73 - it doesn't register quite as hideously as it would if you were 55.
So, I really don't see them changing the rules for exisiting retirement accounts - only for new accounts down the road.
Oh, they'll raise taxes in any possible way - fees, surcharges, tweaks here and there, etc. Alas and alack, they won't fix anything, at least not until things break down completely and they have no choice.
I'm still with us staying in a depression until some time around 2023 or so. Planning remains the same - diversify your accounts and your wealth. Give yourself various options for funding your retirement.
Comments
http://www.politico.com/playbook/0413/playbook10370.html
It looks like Australia is proposing something similar. I'm not familiar with Australian newspapers, so I don't know how "balanced" the link (to an opinion column) below is, but it seems to give a reasonable description of their proposal.
http://www.smh.com.au/opinion/political-news/super-changes-to-hit-rich-retirees-20130405-2haim.html
As near as I can tell from a brief bit of searching, Australia's "superannuation" system is a mix of public pensions (a la SS) and voluntary contributions (a la IRA/401K), though perhaps more investment oriented than our SS. The proposal appears to be to start taxing (at a still reduced rate of 15%) earnings in excess of $100K (AU$) per year on their plans. This seems somewhat analogous to the WH proposal to cap accounts at an amount sufficient to generate an annuity of $205K/year; that is, both are based not on size of account, but size of retirement income generated.
This AU proposal might be somewhat like taxing Roths (rather than imposing a strict cap), except that the money going into our Roths is fully taxed, while contributions to AU accounts get a tax break. (Top Australian ordinary income tax rate appears to be 45%, so contributions, though taxed, are taxed at much reduced rates).
There's there's also a proposal mentioned to tax the contributions at 30% - for those earning over $300K (AU$) - which would still be below the normal tax rate (but above the current 15% for contributions for all earners).
----
Still need to know a lot more about the WH proposal. For example, is the cap on generated income based on nominal or after-tax amounts? If the former, then one can push the after-tax amount higher by doing Roth conversions. By paying the conversion taxes from money in the IRA (not normally recommended), the nominal size of the account would be reduced, but the after-tax value would remain the same (since the money's now post-tax).
Lots of games possible. Need more info.
Also - The White House may be reading the board. As Soshtakovich raised this possibility only two weeks ago: http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/comment/21605#Comment_21605
Also - Recall Rono's advice in that thread to use a multi-legged stool approach for your investments.
Also - MSF has long advised that where possible one's more aggressive (growth-oriented) investments be outside tax shelters. (for somewhat different reasons).
Not unlike the alternative minimum tax of 1968 which eventually (via inflation) trapped taxpayers into having to pay the tax in many future years; any other suitable plan for today could be organized.
The easiest plan would be to re-value the $US. This plan would move many here at MFO into the wealthy bracket via the simple method of adding a "0" to the value of the currency. 1922 Germany had fun with this and more so with today's Zimbawee. The U.S., however, would be through legislation.
Better yet, the Office of Management and Budget could do the 10-20 year calculations to help establish guidelines. Ya, right? Hell, no one can project more than 3 months into the future the way things are operated today.
Don't forget the motto of the day/year for governments from the local to the federal...........
"Shared pain".
A raging rant is awaiting; but I must be back to my work.
Take care,
Catch
One has to believe that the $205,000 annual income limit isn't coming out of the clear blue. A likely source of this figure is Internal Revenue Code Section 415. This sets a limit of $160K, inflation adjusted, for income levels used in capping both defined benefit and defined contribution plans.
Ignoring all the complexity, the bottom line is that this annual income limit built into the tax code is inflation adjusted, and in 2013, it is $205,000. So it seems reasonable to assume (until we hear the details of the proposal) that the $205K is inflation adjusted. Thus the $3M cap is also inflation adjusted, and would not be a pittance in the future.
Of course, I'm just reading tea leaves.
The big money grab is on. It will progress slowly at first; perhaps only in retrospect will you be surprised at how they've siphoned off your hard-earned savings.
Thought I responded last night but . . .
You all knew that this was coming and you really need to plan for it. Of course they're going to try to raise revenue any and all ways possible. They have no choice. Note, that they will also have to cut benefits and break promises in any and all ways possible. Again, they have no choice. They have over $100T in unfunded liabilities and not even a combination of maximum politically viable tax increases and benefit reductions can cover the tab. That means that in addition to raising taxes and cutting benefits, the remainder will have to be monetized. There is no other option. That's what QE . . . nth is all about.
Now with all this said, they historically have pimped us from long range and I don't see this time being any different. By this I mean that they will grandfather everything so that no one is immediately impacted. This limits the howls of outrage because when you're 40 and they change the SS retirement ages to 67-73 - it doesn't register quite as hideously as it would if you were 55.
So, I really don't see them changing the rules for exisiting retirement accounts - only for new accounts down the road.
Oh, they'll raise taxes in any possible way - fees, surcharges, tweaks here and there, etc. Alas and alack, they won't fix anything, at least not until things break down completely and they have no choice.
I'm still with us staying in a depression until some time around 2023 or so. Planning remains the same - diversify your accounts and your wealth. Give yourself various options for funding your retirement.
peace,
rono