$3 Million Retirement Cap | Ed Slott and Company, LLC

$3 Million Retirement Cap

There have been press releases describing a potential total $3 million cap on retirement plans. What happens to someone who already exceeds $3 million-

1) At a minimum, I assume this will forbid any new contributions that bring the total above $3 million.
2) Will excess over $3 million be taxable and if so over what time period?
3) What happens to Roth IRAs with over $3 million?
4) Any limits on non-retirement tax deferred annuities?
5) What about unrealized capital gains on individual stocks over $3 million.

At present this is just an administration budget proposal item with no details, and the details to be addressed in implementing such a plan would be immense. Just guessing, once all of an individual's retirement accounts exceeded 3mm, there would be no additional contributions allowed and would be treated as excess deferrals or contributions and since all accounts would be aggregated, no custodian would know when contributions reached that point. I expect that the retirement industry lobbyists will be able run this proposal through the shredder before it ever reaches a write up in Congress.

Here is an interesting article by Kaye Thomas on this subject: http://fairmark.com/obama-to-propose-retirement-account-cap/

What would happen if you have an individual with say $7MM in a retirement account.  Would they have to withdraw the excess and pay taxes in one year?

No.  However, he/she couldn't make any more contributions so long as the value of the retirement benefits remained in excess of the cap.

I am not a fan of this proposal, but I can think of at least one way that it wouldn't be so impractical.  Many are outraged that the government will need to know how much we have in the bank.  They already know.  For RMD's under today's rules, the RMD is based on the value of your IRA's (all of them) at the beginning of the year.  They could use that same valuation.  So...you add up all of your IRAs at the beginning of the year just like today.  Under the new rules, maybe RMD's kick in earlier than 70.5 if your account is over $3MM.  Or maybe the amount of the RMD is higher if your account exceeds $3MM.  Or both.  I don't think the government would have to start collecting any more information on your savings balances than they have today. Nonetheless, I hope this idea gets killed.


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