Return on Retirement

Big IRAs and 401(k)s are at risk: Where else to save?

Federal budget could hurt retirement savings

We all could be doing a better job of socking money away in our 401(k) plans, yet the lucky few who are able to max out their accounts may be facing caps on their ability to save.

Proposals to stunt the growth of outsized retirement accounts have been under discussion in Washington for years. President Barack Obama's proposed budget for the 2017 fiscal year includes a provision that would require minimum distributions for Roth IRAs at age 70½. Another provision would require beneficiaries of deceased IRA owners (spouses excepted) to take distributions from inherited IRAs within five years.

As in previous years, the budget also called for a cap on 401(k) and IRA accounts, barring contributions and further accruals once balances hit $3.4 million.

And in June, the Bipartisan Policy Center, a Washington-based nonprofit that studies policy issues, proposed curbs on large retirement accounts, calling for a limit of $10 million per individual on 401(k) and IRA balances. The same group also proposed to end so-called stretch IRAs, a strategy where someone who inherits an IRA can continue to grow assets on a tax-deferred basis for years.

Don't panic just yet. "The budget is more of a wish list," said Jeffrey Levine, CPA and chief retirement strategist at Ed Slott and Co.

In the past, "of the 15 or 16 retirement-related proposals [Obama] made, none of them happened," he said.

Right now, IRA and 401(k) plan balances nationwide tend to be fairly modest. At the end of the first quarter, the average amount in a 401(k) was $87,300, while the average IRA held $89,300, according to data from Fidelity Investments.

But in the event you have a fortune in your IRA and you're worried about the proposals to cap how much you can save, here are some work-arounds.

Deferred compensation plans

Talk to your employer about a nonqualified deferred compensation plan.

Employers generally offer these plans to top-earning executives who may surpass the current $18,000 pretax contribution limit to a 401(k). There are no caps on contributions to a nonqualified deferred compensation plan, and savers can continue to put money away on a tax-deferred basis.

Here's how it works. Participants contribute the maximum to their 401(k) first, and then make additional deferrals from their salary and bonus into the nonqualified plan, said John Voltaggio, managing director and senior wealth advisor at Northern Trust.

Employee contributions to the nonqualified plan are usually fully vested, so you won't lose the money you deposited if you leave your job, he said. However, employer contributions may be subject to vesting schedules.

Assets from a nonqualified plan are subject to income taxes when you take the money out, but participants can determine how they'd like to receive their money: as a lump sum at retirement, as a series of payments over a period of years or deferred for a period of time. Nonqualified plan assets aren't subject to required minimum distributions, unlike regular 401(k) plans and traditional IRAs.

A few caveats: If you're no longer employed with a company, the employer may require that the balance be paid out in a lump sum. And if your employer goes under, your money may go with it.

After-tax contributions to your 401(k)

If you're already maxing out your 401(k) pretax contributions, see if your retirement plan allows you to make after-tax contributions.

While you can contribute up to $18,000 each year in pretax money (and $24,000 if you're above age 50), you can make additional after-tax contributions up to $53,000.

These after-tax contributions generally can be withdrawn tax-free, and any earnings are tax-deferred until withdrawal.

Health savings accounts

A health savings account is another way to bypass savings caps.

HSAs are linked to high-deductible health care plans. Contributions aren't subject to income taxes and balances accumulate tax free. Distributions for qualified medical expenses are also tax free, so there is a triple-tax benefit.

For 2016, an individual can contribute up to $3,350 per year to their HSA. For families, it's $6,750. If you're 55 and older, you can make a catch-up contribution of $1,000. Unspent funds can roll over from year to year.

The backdoor Roth

So-called backdoor Roth contributions — conversions of after-tax dollars — are a favorite tactic for taxpayers whose modified adjusted gross income would bar them from making contributions to a Roth IRA.

You can make a total annual contribution of $5,500 to your Roth and traditional IRA ($6,500 if you're over 50), subject to your modified adjusted gross income. You cannot make a Roth contribution if your modified adjusted gross income is $132,000 and you're single, or $194,000 if you're married and filing jointly.

Enter the backdoor Roth. High earners who otherwise couldn't contribute to a Roth IRA can instead make a contribution to a nondeductible traditional IRA and then convert that account to a Roth.

There's a potential hitch. Obama's budget has proposed limiting these types of transfers.

"You don't know if the backdoor Roth will always be available," said Charlie Douglas, board member of the National Association of Estate Planners and Councils and an Atlanta-based wealth adviser.

"I'm a hedger, so I'll have some in a Roth and some in a traditional IRA."