Our Optimistic IRS

America’s Internal Revenue Service turns out to be a pretty optimistic place. This may surprise people who associate the IRS with dense, bureaucratic prose, obscure tax calculations, and no-nonsense audits. But the irrefutable evidence of innate IRS optimism is right there for all to see, in Table III of IRS publication 590-B.

(That description of the document just screams “IRS,” doesn’t it?)

Publication 590-B tells you when and how you need to determine the mandatory “required minimum distributions” from your 401(k) plan and other individual retirement arrangements, because you eventually have to start taking those retirement funds that have been sitting in your retirement account in pre-tax form and start paying tax on them. As Publication 590-B explains at page 8, you figure your RMD “by dividing the IRA account balance (defined next) as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy” set by one of the Tables.

Table III, found at page 65 of Publication 590-B, is the uniform lifetime table that many taxpayers will use. It gives a number for each year of expected longevity that you then use to complete that equation. And that’s where the optimism seeps in, because Table III includes numbers all the way up to age “120 and over.” That’s right: the IRS thinks there’s a sufficient chance that you might make it to 120 that it has formalized and published the appropriate retirement plan tax calculation if that actually occurs.

Pay no attention to the fact that records indicate that precisely one person in modern world history–Jeanne Calment of France, who lived to age 122 before dying in 1997–has made it to their 120th birthday! Some scientists think you have a shot of hitting that milestone, and now you can be confident that the IRS does, too.

By the way, if my understanding of Publication 590-B is correct, if you make it to 120 you’ll have to take half of whatever remains in your retirement account as income at that point, and pay tax on it. Think of the birthday party you could have!

Targeting The Savers

The Obama Administration’s budget is due this week.  According to reports, one of the President’s proposals will be to limit how much Americans can keep in IRAs and tax-preferred retirement accounts.

The proposal is being sold as a way to generate revenue — $9 billion over a decade — but also to achieve greater “fairness” in the tax code.  One of those faceless, nameless “senior administration officials” who are always quoted in these articles says that those pesky wealthy Americans can “accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”  Under the proposal, a taxpayer’s tax-preferred retirement account could not finance more than $205,000 per year of retirement, or about $3 million this year.

Interesting, isn’t it?  The government allows tax-preferred accounts to encourage taxpayers to save for retirement, and the programs actually work.  For decades millions of Americans have been patiently putting money away and investing it, hoping to have a pleasant retirement after years of hard work.  Now an unelected bureaucrat has presumed to decide what constitutes “reasonable levels of retirement saving.”  And while $3 million is more than most of us have in our accounts, let’s not kid ourselves:  once the government concludes it can decide what a “reasonable” retirement looks like, no one’s savings are safe.  With the government’s insatiable appetite for revenue, what’s to keep them from deciding that, say, $50,000 per year of retirement is all you really need?

I’m all for getting our federal budget in balance, and although $9 billion isn’t a lot, I think every little bit helps.  But this proposal seems terribly ill-advised.  It targets people who have sacrificed and saved and are trying to plan for the future — in effect punishing qualities that we should be encouraging.  It’s as if, in the tale of the ant and the grasshopper, the government decided it wasn’t fair for the hard-working ant to keep the fruits of his labor and required him to share equally with that indolent, fun-loving grasshopper.  The problem is that, after a while, the ants are going to get the message and take up the fiddle, too.