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Back in April 2013, President Barack Obama proposed a cap on tax-preferred retirement accounts that would limit them to about $3 million in an effort to generate much-needed revenue for the federal government.
The topic got a lot of attention, and more than one of our readers asked why the government could propose to cap citizens’ retirement savings, but citizens had no power to cap government spending.
Ultimately, the proposal went nowhere in 2014, but then it showed up again in the president’s 2015 budget proposal. Fortunately for folks saving for retirement, Congress is not expected to include the limit when it approves a budget for 2015. But, you might be surprised to learn that the president’s efforts to use retirement funds to fill budgetary gaps weren’t the first to fail, and probably won’t be the last.
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A Tempting Budget Fix
The fact is, tax-preferred retirement funds like 401(k)s and IRAs can look like irresistible piles of cash to governments that are feeling the pinch of out-of-control budgets and falling revenue. Do you recall any of these past bids by the federal government to use retirement funds to solve a budget crisis?
- In an effort to save $80 billion in 401(k) tax incentives, a U.S. House of Representatives subcommittee considered the possibility of nixing 401(k) plans and implementing “guaranteed retirement accounts.” Workers would put in 5% of their pay and the government would deposit $600 a year and guarantee a 3% return. The proposal never made it out of the 2008 subcommittee.
- The Treasury Department borrowed money from federal workers’ retirement funds two times in just a few months as Congress debated raising the nation’s legal debt limit in 2011 and 2012. These were the fifth and sixth times in 20 years the Treasury Department borrowed from federal workers’ retirement money.
- Just a few years ago, President Obama’s National Commission on Fiscal Responsibility and Reform recommended the reduction or outright elimination of 401(k) tax breaks to help cut spending and balance the federal budget. In response, the American Society of Pension Professionals and Actuaries launched a grassroots campaign to protect American’s retirement accounts.
Keep Some Perspective
As you can see, the only time the government has tampered with retirement accounts was when the Treasury borrowed (and promptly paid back) money from federal workers’ retirement plans. The likelihood of the government actually doing away with 401(k)s, IRAs or even the tax breaks for those accounts is slim.
But it’s important to be aware that government leaders do discuss topics like these. Paying attention to these issues makes you a more informed citizen and investor, and the next time you hear talking heads accuse the government of “killing the 401(k),” you’ll be able to keep your cool. Just keep these two things in mind:
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1. Don’t panic. Some investors immediately pull the plug on their investments in an ill-advised effort to keep the government’s hands off their money. But they actually put that money directly into the government’s pockets through taxes and penalties they could have avoided by simply leaving their money alone.
2. Get a professional’s perspective. Financial advisors eat, sleep, and breathe financial news. If anyone has the latest information on financial topics, it will be the folks whose living depends on retirement savings regulations. They’ll be glad to discuss changes with you—even changes that don’t come to pass.
Talk to an Expert You Can Trust
You can find an experienced financial advisor who will always have time to answer your investing questions through Dave’s network of investing Endorsed Local Providers (ELPs). Your ELP will also help you make a plan to build as large a retirement nest egg as possible. Find your ELP today.