This is not a political post but simply poses a question based on current events and a proposal that has been announced.

Recently there has been a proposal that would limit your retirement account balances. There isn’t a ton of information out on the current proposal at the time I wrote this (the official announcement should be out today), but what I know so far is that the proposal would limit retirement accounts to about $3,000,000. According to the report this would allow for a reasonable retirement standard with about $205,000 of income a year.

I had an initial gut reaction and then talked to a friend about the situation and now I feel I can see both sides of the situation. Below I have listed arguments for both sides. Which do you side with?

Go Ahead – Limit Retirement Accounts to a $3,000,000 Balance

Most ordinary, middle-class people will never have retirement accounts that reach $3,000,000. The tax breaks that currently exist for retirement accounts are there to encourage normal people to save for retirement. Limiting them to $3,000,000 shouldn’t affect their motivation at all.

Limiting retirement accounts to $3,000,000 would only get rid of tax breaks for people in the upper-middle class or higher. If they’re able to invest enough to reach a $3,000,000 cap they should easily be able to pay the taxes on any retirement investments beyond that. Currently, the upper classes are taking advantage of these tax breaks and deferring their tax payments to a later date because they can. Would the upper-middle class still invest without these retirement tax breaks? My guess is yes.

Just because retirement accounts are limited to $3,000,000 doesn’t mean that you can’t invest elsewhere. Once you hit the cap you can simply invest in a regular taxable investment account. You could make smart investment decisions in securities that would allow you to avoid taxes in other ways, such as municipal bonds, or simply pay the taxes on the normal type of investments you’d make anyway.

Don’t Touch My Retirement Accounts… They’re MINE!

Don’t you dare touch my retirement accounts! I’ve worked hard to live within my means and save for retirement to live the lifestyle I want later in life. I’ve made smart investment decisions that resulted in returns that exceeded my peers. I’ve maxed out my retirement accounts for years! Don’t punish me for that! I have a feeling a lot of people will react this way…

While $3,000,000 is fine for some people today, for others it simply won’t cut it. If I want to retire in Manhattan then $205,000 a year might not cut it for my family. That’s in today’s dollars at that. If the cap isn’t indexed for inflation what will my son do in 50 years when the buying power of $3,000,000 has significantly eroded due to inflation?

My contributions are already limited so why limit my total balance on top of that? If you want to reduce how much I can save in my accounts, simply lower the future retirement account contribution limits or eligibility requirements and people won’t be able to accumulate the large balances that inspired this proposal.

It isn’t like people are never paying taxes on these large balances. Once they enter retirement and begin withdrawing their retirement funds they must pay taxes. If you’re worried about people using retirement accounts to pass on tax protected money when I die then set up a retirement account tax for when people die.

Setting a cap on my retirement accounts worries me because if they set up this new limit then what else will be changed about my retirement accounts before I retire? Will they determine that I must keep my retirement investments in only a certain type of investment? Will they eliminate retirement vehicles all together and determine I must immediately pay taxes on my full balance? Or even worse… will they tax them like Cyprus?

The Reality of the Situation

In reality, the cap on retirement account balances is just a proposal at this point in time. I don’t think it will even get enacted in today’s gridlocked political environment but it does give us some good food for thought that how we save for our retirement may change in the future.

The retirement tax breaks we currently enjoy aren’t guaranteed. Hopefully the government won’t ever reach into our current accounts, but limiting how we contribute to our accounts in the future is fair game in my opinion. Even if there were no tax breaks I’d still be saving for retirement and I hope you would be too.

Is a $3,000,000 cap too low for some now and for many in the future? Could there be a slippery slope if this is enacted? I think both sides have valid points that should be considered. Which side do you fall on in this debate?

Contributing to your 401(k) is a great way to save for your retirement. The media often touts that you should save first in your 401(k) up to the match, then maybe a Roth or regular IRA, followed by maxing out your 401(k).

I’d say this is good advice most of the time and that is what the media shoots for. However, there are some unique situations where investing in a 401(k) isn’t one of the best options. Believe it or not, there was a time I didn’t invest in a 401(k) for some of the reasons below!

401(k) Offers No Match or Automatic Contribution

It may make sense to skip investing in a 401(k) if your 401(k) offers no employer match. Why? Normally the greatest benefit of a 401(k) is the matching contribution from your employer. No matter how your contributions are matched (dollar for dollar, 50 cents per dollar, 25 cents per dollar, etc) your match is essentially free money and it likely provides one best returns on any retirement investment you could make.

Without the 401(k) employer match, a 401(k) is just another retirement vehicle like many others. It still offers tax advantages, which are awesome, but there are other restrictions that make the 401(k) not quite as flexible as savings vehicles such as IRAs.

Lack of Flexibility and High Fees

Your 401(k) must be held with the institution picked by your company and can only have investments that are part of the plan. Some of these investments will not be suitable for your particular needs and some unfortunately have high investment fees as well. If you have no employer matching, the inflexibility and fees can easily make the 401(k) a vehicle you want to skip until your other options are maxed out.

In fact, a recent piece by My Journey to Millions points out how outrageous these fees can be. His only cash fund option charges 0.95%  in fees just to hold his investment in cash. CRAZY! Those aren’t the only fees. Make sure you watch out for record keeping, quarterly and other annual fees your 401(k) might charge.

Your Employer Contribution May Be Automatic

My employer contribution at a previous job was automatic and would be placed in my 401(k) regardless of whether I contributed or not! Talk about awesome! If this is the case for you it may make sense to max out your IRA before you contribute a dime of your personal money into your 401(k). If you have better options in your IRA than you do in your 401(k) and this is the case I say go for the IRA!

Your Vesting Schedule is Horrible

The last reason I can think to skip contributing to your 401(k) is if your vesting schedule is absolutely awful and you plan to leave town before you would vest at all. Vesting essentially means that if you left your job today you’d get to keep all or part of the employer contribution to your 401(k).

This reason to skip investing in your 401(k) is a bit trickier as you’d have to know 100% that you’re going to be leaving town before you vest in any of your employer match. If your spouse is in the military it may be the case though. If you end up not leaving when you plan or expect you’d be leaving free money on the table… We don’t want that!

Why I Didn’t Contribute to a 401(k) in the Past

As I mentioned above, my previous employer’s had a 100% automatic contribution to my 401(k) regardless of whether I contributed anything to my 401(k) or not. The 401(k) didn’t have the best investment options so I opted to max out my Roth IRA instead. If I had gotten to the point where my Roth IRA was maxed out I would then contribute to my 401(k) but I ended up changing jobs before that happened.

Have you ever not contributed to a 401(k) for one of the reasons above? How about another legitimate reason?