Sometimes, planning for retirement can feel like playing a game in which the goal posts keep moving. For instance, it was revealed this month that President Obama’s proposed 2014 budget includes a provision that would cap tax benefits if your total retirement account savings – whether in an IRA, 401(k) or both – exceed a certain amount, according to CNNMoney.
“The limit would be based on the amount needed to finance an annuity of $205,000 per year in retirement,” explains CNNMoney. “It would fluctuate based on inflation and interest rates, but this year’s account balance cap would amount to $3.4 million for a 62-year-old and $3 million for a 65-year-old.”
Of course, few would be affected if this proposal actually passes. As CNNMoney notes, “At the end of 2011, only 0.03%, or 6,180, of the 20.6 million IRA accounts in [the Employee Benefit Research Institute] database had balances exceeding $3 million, while 0.0041% of 401(k) accounts held $3 million or more by the end of 2012.”
Plus, notes The Wall Street Journal, this proposal could get stuck in Congress for years – or may never see the light of day. And the measure may not even generate extra government income – it merely shifts revenue from the future to the present, according to Ronald O’Hanley, Fidelity Investments president of asset management and corporate services, in The Journal.
Still, whether it’s a proposal to cap retirement savings benefits, a change in Social Security, adjustments in tax rates or even an unpredictable economy, savers have been treading on shifting grounds. To get some perspective on how to navigate an evolving retirement landscape, we spoke to C.E. Scott Brewster, president of Brewster Financial Planning in Brooklyn, New York.
What regulatory changes have happened in recent years to impact saving for retirement?
There have actually been some positive developments over the past decade or so. Now, if you’re selling your house, you have to make a profit of between $250,000 if you’re single and $500,000 if you’re married before you have to pay capital gains tax. It used to be that you’d have to reinvest to avoid capital gains – you’d have to buy another house of equal or greater value. It’s a real positive change. A lot of times, people retire and they want to buy a smaller house. Now they can do so and not pay taxes on the profits and have more money for retirement.
Also, the government did away with the income limitations for doing a Roth conversion. So now people have the flexibility to convert their traditional IRAs to Roth IRAs and have more tax-free income during retirement. Having lower taxable income can be a real help in retirement.
Sadly all the things they have done, they can undo. Originally, Social Security was tax-free. I can definitely see where they could start taxing people’s Roth IRA distribution.
What should people keep in mind these days as they go about saving for retirement?
We might see an increase in life expectancy. Now people have 30-year retirements. What’s going to happen when people have 50- or 60-year retirements? There’s really an incredible need for personal responsibility when it comes to putting together a retirement plan that’s never been needed in the history of mankind – especially with the disappearance of pensions. You don’t want to be living on the edge for 20 or 30-plus years.
I think working with a good accountant makes sense. I see a lot of people who do things first, then ask. So before you make a retirement plan contribution to an IRA, coordinate with your accountant. Make sure you’re working with someone who can help you understand all these changes.
What kind of retirement legislative changes concerns you most? How do you stay on top of the shifting retirement landscape?