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By Adam Zoll and Christine Benz | 04-17-2013 11:00 AM

A Cap on Tax-Sheltered Account Size?

Morningstar's Christine Benz comments on the Obama budget proposal to cap retirement account sizes and shorten distribution periods for non-spouse IRA beneficiaries. Plus, get recent news on 401(k) rollover trends and rising concerns in the long-term care industry.

Adam Zoll: For Morningstar, I'm Adam Zoll, and welcome to The Retirement Radar. Could the government put limits on the amount you're allowed to save in your 401(k) or IRA plan? Here to discuss it is Morningstar's director of personal finance Christine Benz.

Christine, thanks for being here.

Christine Benz: Adam, great to be here.

Zoll: So, as part of his budget, the president recently proposed capping IRA and 401(k) amounts for individuals. What is the exact proposal, and what impact do you think that will have on savers?

Benz: Well, I think proposal is the important word here, so it is just in a proposal phase. It has not made its way through Congress, has not been approved. But what the proposal would set out to do is to cap the amount that savers could hold in tax-sheltered retirement accounts. So that would be IRAs, 401(k)s, 403(b)s, 457 plans, and so forth.

And so it would cap that amount at $3.4 million, and they arrived at that figure by looking at the amount that a 65-year- old could purchase as an immediate annuity, and that amount would buy an annual benefit of roughly $205,000.

So, I would emphasize that this has not made its way through Congress at this point. There is a lot of, I am sure, discussion to be had over this matter. And one tension that it sets up is a tension between the asset management industry, which presides over IRAs and 401(k)s and so forth, and the insurance industry.

And the reason that you've got that tension is that the asset management industry, if there were such caps, would be affected. People presumably might seek out other options, places to put their money if they're looking to have some tax-saving benefits, and insurance companies could in fact be the beneficiaries.

So, life insurance proceeds, for example, are exempt from federal income tax; that might make life insurance policies look relatively more attractive. So, I expect to see a lot of tension, a lot of probably lobbying on the part of these two constituencies, before it's all over.

Zoll: And some estate planning ramifications for high-net-worth individuals here?

Benz: Absolutely. I would imagine that estate planning attorneys and financial planners are taking a hard look at this proposal and seeing if this might require some re-jiggering on the part of their client portfolios.

Zoll: Elsewhere in the budget, I know there was another proposal involving IRAs and inherited IRAs, in particular. Can you talk about that?

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