We Care

Financial planners looking into ways to work around IRA funding cap proposal

As part of its ongoing effort to address the national debt load and the possibility of hitting the “debt ceiling,” the Obama administration has made a number of proposals that would increase income to the federal government and help alleviate the problem. As we’ve previously mentioned, some of these proposals will impact the estate planning process.

One of the measures included in the president’s budget proposal is a lifetime cap on savings in individual retirement accounts and other tax-deferred savings vehicles, including 401(k) plans and profit-sharing plans. The cap, which would be set at $3.4 million, has been a somewhat controversial suggestion, with some financial planners pointing out that the majority of Americans have less than $100,000 in savings, and that setting a cap will have the effect of curbing the growth of retirement plans.

The reasoning behind the proposal is that a worker’s total account balance would be limited to the amount a 62-year-oldneeds to buy an annuity generating an annual payment of $205,000. Those whose savings are around the $3.4 million mark may be wondering what they can do to address the issue in various circumstances that could arise.

Experts looking at the issue have said pointed out a couple possible strategies. One involves advising one’s children to fund Roth IRA accounts early in life until they reach the cap. This would give their investments more time to grow beyond the cap.

A second suggestion is to set up a Roth IRA trust and empty out inherited accounts within five years of the IRA owner’s death. The IRA could be emptied into the trust, and hairs could be required to take withdrawals over a longer period of time so that they avoid a one-time windfall.

These or any other strategies designed to deal with less than ideal legal requirements should, of course, be discussed thoroughly with one’s estate planning attorney, to ensure one’s goals are achieved.

Source: AdvisorOne, “IRA Cap Gives Rise to New Funding Strategies,” John Sullivan, April 17, 2013