The big retirement buzz after President Barack Obama’s State of the Union address was the introduction of the myRA, a “starter” retirement account meant to encourage those who have little or no savings to start on their nest egg.
But the news overshadowed other retirement-related changes that Obama is proposing, which would affect the future tax breaks people receive on their retirement contributions, CNNMoney reports.
The President believes the current rules, while meant to benefit all savers, are actually benefiting the wealthy disproportionately.
According to the Tax Policy Center’s projections for 2015, those who make $100,000 or less would realize a tax break of less than $800 on their retirement savings, on average. Those who make between $100,000 and $200,000 would see an average break of $1,753; earners making between $200,000 and $500,000 are projected to see a break of $5,539; those who make $500,000 to $1 million would see $11,475 in savings; and those who make more than $1 million would reap $14,029 in tax cuts.
Obama is proposing two changes specifically: He wants to put a cap on savers’ combined balance across tax-advantaged accounts, based on the account holder’s age and other factors like inflation and interest rates. If his rules had been applied last year, the total limit for someone age 62 would have been $3.4 million, but for someone 40 years old, it would have been $1 million.
Second, he wants to limit the value of tax deductions for retirement contributions to 28% of the amount claimed. This means that anyone over the 28% tax bracket would see a decreased tax benefit on their contributions.
Although Obama is including these proposals in his 2015 budget, scheduled to be released in March, there’s little reason to expect change: Tax code changes are usually fought tooth and nail in Congress, and experts don’t expect tax reform in the near future.