WARNING Obama Plan Would Bar You From Adding More to Your IRA and 401Ks Under Certain Conditions

 Kathy Kristof of  Kiplinger's Personal Finance, writes:

In his State of the Union address, President Obama promised to shower tax breaks on the middle class. Right after the speech, however, some 66 percent of those polled by Rasmussen Reports said that they suspected the President's plan to hike taxes on the rich would also cause middle-income filers to pay more.

They were right to be skeptical. Diligent savers (no matter their income) would face higher taxes and mind-boggling complexity if the plan became law, according to experts.

Much of the plan is unpopular and unlikely to pass. Still, tax hikes have a way of sneaking back into proposed legislation, so it pays to know what's being discussed....

[I]f you've been saving prodigiously, your ability to continue contributing could be in jeopardy. A provision billed as a "loophole closer" would subject all savers to a complex rule that now affects only defined-benefit pensions (the type with set monthly benefits for life).

Under the plan, each year you'd add up all the money accumulated in tax-deferred accounts, including IRAs and 401(k)s, then project what the total would be worth when you hit 62. If the projected savings could be converted into an annuity that would generate more than $210,000 annually at age 62, you'd be barred from saving any more in tax-deferred accounts.

In the EPJ Daily Alert. I have been advising that I expect interest rates to climb for years. We could very well see rates climb to double digit levels (mostly because of accelerating price inflation). If this does occur, this Obama provision is going to impact many more people than it does now, at current low interest rates.

If we assume even a conservative interest rate of only 10%, an individual who only has approx. $245,000 in tax deferred savings accounts at age 40, would be barred from adding to the savings accounts FROM AGE 40 ON. (At an interest rate of 12%, the savings cut off would be approx. $165,000)

And money outside the deferred accounts, under this scenario, would be taxed on what for the most part would simply be interest earned to maintain the purchasing power value of the funds. That is, the tax, for all practical purposes, would be an extraordinary tax on retirement savings beyond a very limited sheltered amount.

-RW