As expected, the White House budget calls forlegislation that would prohibit individuals from accumulating morethan $3 million in individual retirement accounts and othertax-preferred defined contribution retirement accounts, such as401(k)s. With the release of the full budget details April 10, itbecame clear the proposed cap would apply not only to individualaccounts (such as IRAs and 401(k)s) but to defined benefit pensionplans, as well.

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THE FINE PRINT

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The applicable text, found on page 33 of theWhite Housebudget proposal:

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Limit the total accrual of tax-favored retirementbenefits.—The Administration proposes to limit the deduction orexclusion for contributions to defined contribution plans, definedbenefit plans, or IRAs for an individual who has total balances oraccrued benefits under those plans that are sufficient to providean annuity equal to the maximum allowable defined benefit planbenefit. This maximum, currently an annual benefit of $205,000payable in the form of a joint and survivor benefit commencing atage 62, is indexed for inflation, and the maximum accumulation thatwould apply for an individual at age 62 is approximately $3.4million. The proposal would be effective for taxable yearsbeginning after December 31, 2013.”

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Savings account cap proposal

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The $3 miillion club

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Age distribution of individuals with an IRA balance exceeding $3million in 2011 think about the future

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Think about the future

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Impact of age on percentage of 401(k) participants reaching newlimit (adjusted for inflation), by age 65

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Target date

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With the expanding availability and use of retirement planinvestment choices such as target-date funds, one might well assumethat future asset allocations will be adjusted in accordance withage. Taking age adjustments into account in asset allocation, EBRIfinds that 1.2 percent of those aged 26–35 in its sample would beaffected by the adjusted $3 million cap by the time they reach age65.

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Floating cap $205,000

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The retirement plan account savings cap in the White Housebudget proposal is reportedly tied, not to a hard dollar limit, butrather one that would finance, in 2013, an annuity of $205,000 peryear in retirement, the IRC 415(b) annual benefit limit for definedbenefit pension plans. The corresponding account balance thresholdwould fluctuate over time, based on discount rates—and that meansthat the number of accounts that could exceed the threshold in thefuture could be significant.

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Think of the children

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Time increases the probability that younger workers will reachthe inflation adjusted limits by the time they reach age 65, with2.2 percent of those currently ages 26–35 affected by the $3million cap (adjusted for inflation), compared with just 0.1percent of those ages 56–65.

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