Grand Rapids, MI -- (SBWire) -- 06/26/2013 --Are you one of the many people who have trouble keeping up with what is going on in the U.S. economy?

Dennis Tubbergen, a financial advisor, author, radio show host and CEO of PLP Advisors, LLC can help out. Whether people enjoy his monthly newsletter at www.moving-markets.com or his blog at www.dennistubbergen.com, Tubbergen is dedicated to sharing his viewpoints and opinions. On June 18, 2013 his blog was titled Will New Ira or 401(k) Rules Affect You?

"While I have written about President Obama’s proposed limits on the amount that you can contribute to an IRA or other retirement account in the past, I wanted to expand on this thought," began Tubbergen. "Recently, I have had conversations with many, many folks who are concerned about the rules regarding IRA’s or other retirement account changing. As you might expect, all these folks were concerned about the rules changing so they were not as favorable to the taxpayer."

Below is an article Tubbergen previously wrote.

"President Obama’s budget, according to a Bloomberg article published recently, will limit investment levels in IRA’s and other retirement accounts to $3 million," noted Tubbergen. "To be fair, the details of the proposal are not clear, but the fact that the idea of retirement account investment limits are even being discussed should be very alarming to everyone."

President Barack Obama’s budget proposal would cap multimillion-dollar tax-favored retirement accounts like the one held by Mitt Romney, his Republican rival in 2012.

Obama’s budget plan, to be unveiled April 10, would prohibit taxpayers from accumulating more than $3 million in an individual retirement account. That proposal would generate $9 billion in revenue for the Treasury over the next decade, according to a White House statement released today.

“Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving,” the statement said.

The most prominent taxpayer with a multimillion-dollar IRA is Romney, the 2012 Republican presidential nominee and co- founder of Bain Capital LLC. Romney disclosed in public filings during the campaign that his retirement account held between $18.1 million and $87.4 million. At one point, the maximum exceeded $100 million.

IRAs have evolved from a retirement-planning technique into an estate-planning tool for some wealthy families because tax laws allow the accounts to be passed on to heirs, said Ed Slott, an IRA specialist and certified public accountant based in Rockville Centre, New York.

“Over the last election it hit a critical mass when a lot of people found out that Romney had $100 million in his IRA,” Slott said. “People thought, how on earth did that happen? I think that was the tipping point.”

The Romney campaign didn’t explain how he amassed that much money in an IRA when contribution limits are much lower. Most taxpayers can contribute a maximum of $5,500 for 2013. Older workers, self-employed workers and those who save through 401(k)-style plans have higher caps and can roll those accounts into IRAs.

One possibility is that Romney included Bain investments valued at close to nothing that later grew exponentially. The value would increase tax-free in the retirement account and would be subject to taxation at ordinary income tax rates when taken out.

Democratic lawmakers, including Representatives Sander Levin of Michigan and George Miller of California, asked the Treasury Department last August to answer questions about large IRAs and to make policy recommendations.

The administration’s statement didn’t explain in detail how the proposal would work. The cap would apply to the total of all of an individual’s tax-favored retirement accounts.

First, let me talk about how Mr. Romney could accumulate that much money in a retirement account. As the article states, contribution limits to a retirement account are determined by the IRS and may increase year to year.

While the article correctly states that IRA contribution limits are $5,500 this year, it fails to point out the other types of retirement accounts that allow much larger contributions. For example, a plan like a defined benefit plan allows for contributions large enough to fund a specific level of pension income at retirement. If a company were to adopt one of these types of plans, contributions to the plan are made for each plan participant with older participants potentially getting a larger contribution than a younger plan participant due to the fact that the contribution will have a shorter time in which to grow.

For example, a 50 year old who will be collecting $2,000 per month at retirement might require a larger plan contribution than a 30 year old who will be collecting the same $2,000 per month at the same retirement age. Presumably, the contribution made for the 30 year old will have longer to grow than the contribution made for the 50 year old. If these plans are terminated, the plan balance allocated to a plan participant can be rolled to an IRA account. It’s likely that Mr. Romney had a plan along these lines and, as the article states, it’s also almost a certainty that the investments in the plan grew exponentially.

"Here is what the article doesn’t state," explains Tubbergen. "The IRS owns about 40% of Mr. Romney’s retirement account. In spite of the fact that during the election much hype surrounded the fact that Mr. Romney paid a tax rate on his income in the 15% range due to much of the income being from capital gains and dividends, that will all change for Mr. Romney when he reaches the age of 70 ½. At that point, Mr. Romney will be required to take required minimum distributions from his retirement plan. Assuming a balance of $100 million in his IRA at that point, Mr. Romney’s required minimum distribution from the plan would be between $3.5 and $4 million. That distribution would be taxed at ordinary income tax rates, currently 39.6%."

Tubbergen goes on to say the very important point here is that as an IRA account grows for the investor, it also grows for the IRS. And, assuming tax rates in the future are higher, the IRS’ share can even grow disproportionately to the share of the investor.

Second, the CPA quoted in the article states that IRA’s are an estate planning tool because tax law allows the accounts to be passed to heirs. While that is true, when the heir inherits an IRA, required minimum distributions begin IMMEDIATEY based on the heir’s age and remaining life expectancy at that time.

In this case, as in the case of an IRA owner reaching the age of 70 ½, income taxes are paid on distributions and are taxed at ordinary income tax rates. In the case of wealthy families, that tax rate is once again 39.6% under current law; and that’s before state income taxes if applicable. While heirs inheriting IRA’s can further defer the income taxes due, the income taxes can’t be avoided. Assuming the inherited IRA continues to grow, total taxes paid on the IRA may actually be significantly higher over time than if taxes were paid on the account at the death of the original IRA owner.

"This idea of capping retirement account investments will, in my view, ultimately REDUCE the total tax revenue generated by IRA’s and other retirement accounts," notes Tubbergen. "As a retirement account grows for the investor, it also grows for the IRS. Distributions from an IRA are taxed at the highest income tax rates in the code. That being the case, why would the government want to limit the level of investment in an IRA? It’s certainly not for tax reasons; more tax revenue is ultimately generated by a large growing IRA than one that is smaller. My view is that this proposal is purely political, intended to create another reason for the have not’s to hate the haves.

Third, the article states that the proposal would generate $9 billion in tax revenues over the next decade. The accountant that made that calculation would probably have to take his shoes off to count to 20. This will be a net tax revenue loser for reasons that I’ve already stated."

According to Tubbergen, the fourth reason is noted in the White House statement quoted in the article, “Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.” This is simply farcical. Here we go again, the government helping us determine what is reasonable.

Finally, if this IRA limit becomes law, it will have unintended consequences. Charitable contributions will decline. Wealthy individuals with charitable intent typically leave their IRA’s to charity rather than their heirs. An IRA is the least efficient asset to own from a tax perspective and when an IRA is left to charity, the entire balance goes to the charity and no income taxes are paid. I can cite many, many times through the years that both wealthy and middle class clients have left their IRA’s to their church or charity for this fact alone.

Another unintended consequence of this notion should it become law is that retirement plans at employers may cease to exist in the same numbers that they do today making it harder for the ever-shrinking middle class to conveniently save for retirement. A business owner who sponsors a retirement plan may terminate the plan when her IRA limit is reached making a company sponsored plan unavailable to many workers. After all, if the business owner can’t contribute, what is the incentive to keep the plan?

"Prior to this article being published, I was of the opinion that folks saving for retirement should consider accumulating assets outside a retirement account," concludes Tubbergen. "Given the current tax trends and fiscal condition of the US, why would anyone want a joint account with the IRS considering that if future tax rates are higher than today, the IRS’ share grows?"

To read the blog in its entirety go to http://www.dennistubbergen.com and select his June 18, 2013 entry.

Tubbergen’s syndicated radio show can be heard on metro Michigan stations WTKG 1230 AM and WOOD Newsradio1300 AM and 106.9 FM.

About Dennis Tubbergen
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in Grand Rapids, Michigan. Tubbergen is CEO of PLP Advisors, LLC and has an online blog that can be read at www.dennistubbergen.com. To view Tubbergen’s latest Moving Markets? newsletter, go to www.moving-markets.com.

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.