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IRA, so as to provide, say, children and grandchildren with long-term income-tax free annuities. Nevertheless, even if those beneficiaries had to take the balance of the Roth IRA within five years of the owner's death, they still would be receiving income-tax free dollars — something that would not be the case if they had simply “inherited” a traditional IRA with its built-in income tax liability. In other words, by converting a traditional IRA into a Roth IRA, the owner is accomplishing something akin to what happens with a defective grantor trust (see above): relieving the beneficiaries of an income tax liability they would otherwise have to pay. Limit the size of retirement benefits. Under current law, there are limits as to how much individuals can accrue under a defined benefit plan (such as a pension plan), or how much they can contribute to IRAs and various defined contribution plans, such as 401(k)s. There are no limits, however, as to how much individuals can accumulate in these tax-preferred accounts. Because of this, the proposal explains, individuals can accumulate more than is needed to fund “reasonable levels of consumption in retirement...well beyond the level of accumulation that justifies tax-advantaged treatment of retirement savings accounts.” The proposal would therefore cap the size of a taxpayer's various retirement accounts by barring additional contributions (or accruals) if, in total, the accounts exceeded what was necessary to provide the maximum annuity permitted for a defined benefit plan: currently $205,000 per year for a hypothetical 62 year-old and her spouse (this equates to accumulations of about $3.4 million). When a taxpayer’s accounts hit that ceiling, they could still grow through investment returns, but additions to the accounts would only be allowed if the maximum permitted annuity increased, or the taxpayer's investment returns for a given year were less than the actuarial assumptions underlying the annuity. If an addition put a taxpayer’s accounts over the ceiling, the taxpayer would include that excess in income, and have a grace period to withdraw it; if the taxpayer did not withdraw the excess, then that amount and attributable earnings would be subject to income tax when distributed, even if the distribution was from a Roth IRA or a Roth 401(k). Comments. This new proposal seems to be a reaction to this fall's presidential elections and the significant retirement accounts of one of the contenders. Nevertheless, it is not an excise tax to whittle down significant accounts, but a prohibition on additional contributions (or accruals). As Treasury Secretary Lew has pointed out, we’re not saying you can’t save for retirement, we’re just saying that such large amounts shouldn't be tax-preferred. Still, will Congress really be inclined to limit how much taxpayers can accumulate in their retirement accounts, especially when a rising interest rate environment would make the permitted accumulation smaller? Although anything is possible, particularly if tax reform really comes about, Congressional sentiment might be against what could be viewed as “penalizing” successful savers. Replace Consumer Price Index (CPI) with Chained CPI. Every year, the IRS issues inflation-adjusted numbers for a variety of provisions, such as the income thresholds for the individual income tax rate brackets, personal exemptions, and income thresholds and phase-out ranges for various deductions, exclusions and tax credits. The proposal states that the CPI overstates the effects of inflation because it doesn't fully reflect consumer reaction to price changes (as in, if prices go up, consumers will buy something cheaper). A “chained” CPI would “account more fully for this substitution effect” and better reflect changes in the cost of living. The proposal would take effect as of 2015. Comments. Just as the proposal to limit tax benefits for income that would be taxed at higher than 28% would raise taxes on some of those President Obama has previously pledged to protect (see above), a chained CPI would also raise taxes for everyone, in that tax brackets (and other tax benefits, such as personal exemptions) would increase more slowly. Similarly, a chained CPI would reduce cost-of-living increases for Social Security recipients — again something that would affect those the President has pledged to protect. Although this proposal represents an attempt at balance, Republicans and Democrats generally seem to dislike it, but for different reasons. Tax Topics 04/29/13 5 HOUSE_OVERSIGHT_022365