There’s been a great deal of talk as of late about Obama’s proposed budget caps on IRAs. Set to cap out at $3.4 million, many haven't paid much attention to a proposal that would not likely have any effect on them whatsoever.
But the fact is, it may affect more than just America's extremely wealthy.
According to USA Today, Obama's IRA plan would only affect around 0.03% of the population, based upon statements from the Employee Benefit Research Institute.
But this doesn't tell the whole story.
Rather, numbers are based on what you could get in your retirement plan if it was converted to an annuity, which would put the annual budget at $205,000 per year.
For those who are in the dark about how annual annuity payments can be affected in terms of size and scope, there are a variety of factors at play that need to be taken into consideration. Perhaps the most important thing to understand is that interest rates can directly affect the end result of annuities under Obama’s cap proposal.
While interest rates are low now, they are bound to increase in the future. The higher interest rates get, the lower the $3.4 million threshold will fall. If interest rates were to return to where they were just 7 years ago in 2006, the budget cap could potentially drop to $2.2 million.
The major belief for many Americans up until now has been that Obama’s budget cap on retirement would likely affect only the super wealthy. Pay close enough attention to the details, however, and it becomes abundantly clear that they could also affect the upper middle class. This includes those with large savings, as well as those who work in small businesses.
Obama’s plan is designed to bring in approximately $9 billion over the course of the next 10 years, something that most people would agree would be beneficial to helping America solve its debt crisis. But a plan restricting retirement could go too far, and it could have a strong effect on the middle class.
To put things into perspective, one would have to accumulate only $7,200 in savings over the course of 50 years in order to reach the $3 million threshold based upon a 7% interest rate. The more one pays attention to the details, the clearer it becomes that everyday working Americans could see a host of problems with Obama’s plan.
One of the major issues with the budget cap comes down to how it is affected by interest rates. The $3 million cap may be true as of today, but as interest rates increase, the threshold will go into decline.
Given this, it would be next to impossible to accurately predict how far the threshold could fall in the future, and this has many Americans uneasy about the future of their retirement. After all, most people would prefer to lock into a retirement plan that isn’t subject to change.
But they won’t have much of a choice under Obama’s plan.
Looking Towards Retirement
Preparing for retirement can be very anxiety-producing for some people, especially those who are unsure as to how their financial future will pan out.
The Obama IRA plan not only makes things more complicated, but it could affect the way retired Americans withdraw and even spend their money. It wouldn’t be out of line to expect that individuals who put aside savings each year from the time they are 20 years old could someday be affected by the budget cap—a subset of Americans that don’t usually get thrown in with the super wealthy.
Determining what the future will bring in regards to Obama’s plans may be easier said than done, especially given the fact that the plan is not scheduled to go into effect until the fiscal year of 2014.
Those who may potentially fall within the affected income bracket are learning more and more, though, that the details of the plan indicate these caps are not in their best interest.
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