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Who the heck has $3,000,000 in their IRA?


Have you paid attention to President Barack Obama’s 2014 proposed budget? It includes a provision to put a 3 million dollar cap on your tax-preferred retirement accounts. This proposal would generate $9 billion in revenue for the Treasury over the next decade according to White House. Actually, the limit would be based on the amount needed to buy an annuity that will pay $205,000 per year.

What’s my cap?

First of all, it seems a little silly to base the limit on annuity. The payout varies according to your age, sex, inflation, and interest rate. If you are a 62 year old female retiree, you would need almost 3.5 million dollars to generate $205,000 per year. On the other hand, if you are a 65 year old male, you would need just about 3 million dollars. I guess they will just average it and come out with a fixed number every year. Why don’t they just set the cap at $3,000,000 and adjust it for inflation every year? That seems much easier to me.

The cap is for the contribution

From what I understand, once your IRA accounts reach 3 million dollars, you won’t be able to contribute anymore. Your accounts can still go over the cap by appreciation and dividend.

Mitt Romney $100 million IRA Obama cap IRA

Who the heck has $3,000,000 in their IRA?

That’s my big question. The EBRI’s database has 6,180 accounts exceeding $3 million (out of 20.6 million accounts.) That’s a very small subset of IRA owners. Who could have saved that much in their IRA? Even if you maxed out your 401k for the last 25 years, you would have to be a great investor to get there.

For 2013, workers can contribute $17,500 to their 401(k). If you are over 50, then you can add $5,500. At this rate, it is extremely difficult to reach the $3 million mark.

Well, we do know one person who greatly exceeded this cap – Mitt Romney. His IRA is estimated to be worth somewhere around $100 million. Wow! That’s a load of money. How did he stuff his IRA? Nobody except his financial advisor knows, but let’s take a tour of the various ways rich folks can beef up their retirement accounts.

Nonqualified Deferred Compensation Plans

  • Elective deferral plans– The participant can be paid in the future for service rendered this year. If you didn’t get paid this year, then you don’t have to pay tax.
  • Supplemental Executive Retirement Plan – The employer makes a contract to pay the executive upon retirement.


If you are self employed, you can contribute 20% of your income or $51,000 (whichever is lower) to the SEP IRA. Your business has to make nearly $270,000 before you can take full advantage of this benefit. My side business made $13,630 last year so I could have contributed around $2,500 extra to my retirement if I was more on the ball. Yes, if you have a regular job and a side business, you can contribute to your employer’s 401(k) and to your business’ SEP IRA.

Solo 401(k)

If you are a business owner with no employee, you can open an individual 401(k). You have the same contribution limit as the regular 401(k), but your business can match up to 20% of your self employment (SE) income up to $51,000. It sounds the same as SEP IRAs, but at lower income level, you can save a lot more with solo 401(k). For example, if I make $20,000 in SE income this year, then I can pile $18,587 into a solo 401(k).

Actually the calculation is a bit more complicated so let’s just use a solo 401k calculator. I really like this calculator because it shows SEP IRA, solo 401(k), and SIMPLE IRA. I’ll skip SIMPLE IRA because the maximum contribution is less than the regular 401(k) limit.

Here is a table if you are curious.

Net SE earningSolo 401kSEP IRA

It would be awesome to contribute $51,000 per year to my retirement plan. Then I think $3 million would be well within reach especially if you can contribute like this over 15 to 20 years.

solo 401k

If your business makes $200,000 in 2013 and you are younger than 50.

Regular folks

For regular folks like you and me, we really should just worry about just saving as much as we can for retirement. Most retirees have less than $500,000 in their retirement portfolio and that’s way under the $3 million cap. I’m not going to worry about the IRA cap at this point. I’m much more focused on living a happy life on a frugal budget.

Are you worry about the $3 million IRA cap? I think $205,000 per year is plenty of money to retire on.

photo credit: davelawrence8

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 52 comments… add one }
  • Robert Sterbal December 18, 2014, 6:55 am

    The key point is that the tax advantages of retirement saving should end for people with over 3 million dollars in assets. After that, save for retirement without any tax advantage. There are plenty of ways of doing that.

    • retirebyforty December 19, 2014, 7:31 am

      3 million dollars in the retirement accounts or assets? I assume you mean retirement accounts. I think 2 million is probably good for us because our expenses are not that high.

  • davidmichael July 11, 2013, 9:22 am

    One other comment…while we all like to think the USA is full of young millionaires walking the streets in retirement or working a few hours each day or week, the fact is…only 2% of the polulation earn more than $250,000 a year. According to Wikipedia, millionaires on average are 61 years of age with approximately $3,000,000 in assets. Wonder how many there are at age 40?

  • davidmichael July 11, 2013, 9:13 am

    One of the smartest things I did as a small business owner with a handful of employees is to put in a Profit-Sharing Plan for all of us at the company. Any time we had a profit at the end of the year, we stuck it away in our retirement accounts and let it grow. Since I was the owner and benefitted the most I made sure that we made a profit. We all prospered as a result. Our company rarely payed taxes (except SS, etc). This is one small example that the US Tax Laws are really slanted towards business and not the individual. So, Joe, for instance, can start his own Sep IRA and enjoy the fruits of his labor by having a similar profit sharing plan. The USA is not perfect but with help from accountants and lawyers, the individual tax payer (entrepreneur) can establish plans that make it easier to become a millionaire by age 40.

    • retirebyforty July 11, 2013, 9:54 pm

      I plan to open a Solo 401k this year. I think I can put away nearly 50% of the net income. That’s a big tax break.

  • Sam June 11, 2013, 1:53 pm

    The framing is all wrong I think. We get a tax break for saving for retirement because everybody is better off if we can provide for ourselves in retirement. Why should the tax break extend to beyond a basic ability to provide for yourself? Keep in mind that any tax break requires a tax raise somewhere else.
    The same goes for capping mortgage interest. At some point, unlimited tax deductions just reward rich people for stuff they’d do anyway. Given the tax policy choice of lowering rates for everyone or giving a deduction to a super rich person, you should pick lowering rates.

  • Brick by Brick Investing April 21, 2013, 4:57 am

    I did not know that you can only “contribute” up to 3 million dollars. I was under the impression that your account could not exceed 3 million. Thank you for the clarification.

  • Ed Mills April 20, 2013, 2:40 pm

    Unless there is hyperinflation on the horizon, I don’t think the $3,000,000 cap will be an issue for me. My wife and I are aggressive savers who max out 457, 403b, IRA, ESA and HSA accounts. We’re nowhere near the $3 million IRA limit. We plan on doing fine on considerably less.

  • Mike April 20, 2013, 12:51 pm

    I find this interesting. I am at the age where I am already starting to plan my retirement (I’m only in my mid twenties) but I think it’s time to start thinking about it as much as possible. In particular, I think your mention of the IRA and 401(k) of the SE variety will be of interest to me long term.

  • Manette @ Barbara Friedberg Personal Finance April 20, 2013, 2:03 am

    “I’m not going to worry about the IRA cap at this point. I’m much more focused on living a happy life on a frugal budget.”

    I defintiely agree with you. I find this cap issue silly and ridiculous so I would rather not think about it. At any rate, my IRA will not go over $3M. There are a lot of things that we should think about — family, work, finances, and vacation.

  • Bobby @ Ban Excuses April 19, 2013, 6:11 pm

    If you have $3 million saved in your retirement accounts, then you have likely made quite a sizable sum over the years. I personally would have retired well before my retirement accounts reach anything close to that level.

    • retirebyforty April 20, 2013, 3:17 pm

      That’s what I would do too. I’d rather enjoy life now and not spend so much time at work.

  • Joey April 19, 2013, 4:43 pm

    It is tough to get to 3 million with the options most employees have in their 401k plans. Usually mostly index and safe, well diversified funds.
    There are many millionaires where I work who bought company stock in the 401k for 20-25 years and then Warren Buffett’s Birshire Hathaway bought the company at a huge premium.. 🙂
    That is one way to get to $3 million quickly.

    • retirebyforty April 20, 2013, 3:15 pm

      That’s great! I think that’s fair if they were willing to risk that much.

  • Joe April 19, 2013, 3:13 pm

    My main concern is that once in place, the cap will slowly lower because the government always seems to be short of money and looking for more ways to squeeze some out of us. Especially symbolic ways, such as this proposal. It may raise $9B over the next 10 years, but the US government spends about that much every DAY!

  • kathleen April 19, 2013, 10:31 am

    This will be an issue for me exactly never, unless my life goes in a TOTALLY different direction!

    • retirebyforty April 20, 2013, 3:13 pm

      You can always marry a multi-millionaire. 🙂

  • krantcents April 19, 2013, 10:19 am

    Normal employees are very unlikely to reach the $3 million cap. It will be entrepreneurs who can contribute more . Is it fair? Should there be a limit on how much you can defer? Personally, I would rather have a huge brokerage account where my earnings will be taxed at capital gains rates. The negative is it does not grow tax deferred!

    • so April 19, 2013, 10:52 am

      Superb point on cap gains vs. ordinary income for your gains on withdrawal!

      • slug | sunkcostsareirrelevant.com April 19, 2013, 1:38 pm

        And that’s all well and good until they decide to change the capital gains rates to extract more blood from us. I hate to see them messing with retirement savings vehicles in any way. It further erodes the trust they want us to have in the system which can only be maintained by consistency in the system over time – not changing the rules along the way.

        • retirebyforty April 20, 2013, 3:13 pm

          I’m sure higher capital gain tax is coming down the pipeline. Hopefully it will stay the same for people @ 25% bracket and less though.

  • Pretired Nick April 19, 2013, 8:48 am

    So you’re saying there is a set of rules for the wealthy and another set of rules for everyone else? I’m SHOCKED! (:
    The loopholes that let these guys (like Romney) stash endless amounts of wealth in retirement accounts need to be called what they are: tax-dodging schemes created by corrupt politicians to benefit their rich friends. No one who needs to worry about saving for retirement needs to worry about any cap.

  • John S @ Frugal Rules April 19, 2013, 8:39 am

    I am not worried about it personally and while we have SEP’s I doubt we’ll get there. For me it’s the principle of the matter. You give in on this and no telling where it’ll go from there.

  • Brandy April 19, 2013, 8:30 am

    My concern is it all retirement accounts or just IRA’s? And does it combine spouses? I have tried to find these answers online and I cannot. I think it is one of those things were you have to see the bill after it passes before you can know what is in it LOL

    On a side note, if you take out 4% of $3,000,000, that is only $120,000 not $205,000. After taxes you are looking at less than $100,000/year. My guess is that if you have the ability to save up $3 million, you are probably making more than $100,000/year…so that would be a pay cut if you are capped at $3 million.

    • retirebyforty April 20, 2013, 3:11 pm

      The cap is for all retirement accounts. I don’t know about combining.
      You can always load up on Roth and then it will be $120,000 with no tax. 🙂

  • so April 19, 2013, 8:15 am

    This is a non-issue. There’s no punishment here, the 401(k) / IRA and the home mortgage deduction are giant subsidies to the middle class, and limiting the accounts is not a form of punishment, it’s just an indication that your subsidy / tax preference goes only so far, but no further. It’s like how the home mortgage deduction is capped at $1m, that doesn’t punish you if you have a larger mortgage, it’s just acknowledging the reality that you don’t need a tax preference to encourage homeownership after a certain point. Similarly, once you have $3m, you don’t really need a tax preference to encourage retirement savings.

    The contributions have always been limited, as Joe notes, this is just another limitation that would affect virtually no one. Further, it’s not like you stop receiving ANY tax preferences for investments once you hit $3m tax deferred. If tax avoidance is important to you, invest in munis or real estate or start a business and take advantage of the tax preferences there once you are at the $3m limit.

    If you contribute $17,500 over thirty years, at a marginal rate of 33%, you’ve already saved $173,250 in taxes. That’s a hefty subsidy; hard to see that as the gov’t punishing success. This whole “we’re being punished for something that won’t happen, but it might, so it will, so WAAAH my success is being punished” is the height of entitlement. An available $173,250 in subsidies isn’t enough, you need more?

  • SavvyFinancialLatina April 19, 2013, 7:45 am

    Our money is never safe from taxes!!! Ahhh!!!

    How do you open a legal business for your side business??? What are the steps you have to do?

    I always enjoy reading your blog!

    • retirebyforty April 19, 2013, 10:09 am

      You just need to file the self employment schedule with your tax. If you’re not making much money, that’s enough.

  • William Cowie April 19, 2013, 7:03 am

    The proposal, as stated, won’t affect me that much. However, the message it sends is downright perplexing. Because here’s what Obama is telling America: “Hey, if you are diligent to the point of success, we sincerely want to penalize you.”

    Wouldn’t it be MUCH more effective if the gummint taxes you if you have LESS than, say, $100,000 in your IRA? It’s not like there’s precedent: The exact same man, Obama, has told ordinary Americans he will tax us if we don’t have medical insurance. So… if he can tax us if we don’t spend money to take care of ourselves one way, why not tax us if we don’t take care of ourselves another way? It’s the same thing, and it’s already been done.

    Can you imagine how much better that will work for the country as a whole, and for individuals?

    • retirebyforty April 19, 2013, 10:08 am

      Well, you can always save in your after tax accounts.
      Putting a lower limit would be hard to implement. They are already penalizing themselves by not taking advantage of the tax break.

  • JC @ Passive Income Pursuit April 19, 2013, 6:55 am

    This won’t be an issue for 99%+ of workers but I am afraid that people will hear there’s a cap and stop contributing. Which would be a shame because most people are already in dire straits when it comes to retirement savings.

    I had no idea the difference between the Self-employed and Solo 401k. If I ever generate enough income from my side gig, my blog, then going the solo route is definitely the way to go if possible. Do you still have to pay taxes on the net earnings of the business if it’s all contributed to the solo 401k? If not then that’s a huge chunk of money you can shelter from the tax man.

    • retirebyforty April 19, 2013, 10:06 am

      You have to pay tax first and then take your contribution out of the rest.
      The important point to note is that you can have your 401k at work and contribute to SEP IRA too. That’s pretty good.

  • Jenny @ Frugal Guru Guide April 19, 2013, 6:50 am

    My husband’s company matches a chunk of his contribution. We’re at $25,500 per year for his 401(k). Two people working there would be at $51k per year.

    That would yield $4 mil in 30 years IF we were starting from scratch, which we aren’t.

    I’m opening a solo 401(k) this year, too, and contributing the maximum. It won’t be anything like $51k on my own, of course, but for someone else it COULD be.

    With inflation, our “bare minimum” retirement goal in 30 years is….$3 million. That will yield around $160k per year, or, in today’s money, about $51k. At most. Obama might think that “no one” needs that much money, but we’d like to have enough to stay in our paid-off house (which will cost $1000 a month in today’s dollars, even with no repairs–property taxes and utilities aren’t cheap), keep at least one car ($4000 a year), pay our medical bills, and do a little traveling, too.

    • retirebyforty April 19, 2013, 10:04 am

      $25,500 is great!
      I think the $3 million is in today’s dollar. They have to adjust it for inflation or else it would hat a ton more people….

      • Chris April 21, 2013, 7:36 pm

        Not unlike how the AMT didn’t have an adjustment for inflation put in before it hit the middle-class folks, eh? 🙁

        • retirebyforty April 22, 2013, 9:29 am

          You’re right about that… I had to pay AMT this year and it sucks.

    • Naga October 24, 2013, 9:54 pm

      I totally agree with you. 51000 is doable for two people working and maxing their 401k. In my case we save about 76000 an year as a couple in retirements.

  • Greg April 19, 2013, 5:39 am

    Can’t say I am too worried about it and I think I can live on much less than $205,000 a year.

    The Romney example shows how, no matter what the caps and limits and laws, the cat and mouse game between money regulation and the citizens will always continue.

    • retirebyforty April 19, 2013, 10:02 am

      He must have made a lot of contribution in stocks and options. The rich folks have the best lawyers and tax accountants. 🙂

  • The Dividend Guy April 19, 2013, 2:37 am

    wow… I’m shocked to see how much you can put in your IRA!

    In Canada, we have a similar system called RRSP. But the maximum you can invest per year is equal to 18% of your income. The contribution is also capped (around 22K right now). Therefore, for Canadians, it’s impossible to reach 3M$ in your RRSP acount unless you A) maximize your contribution B) make over 100K during your whole career and C) live long enough to pile up to 3M$!

  • My Financial Independence Journey April 19, 2013, 2:26 am

    I think the cap is silly. I certainly don’t understand why they would base it on an annuity – which in my opinion are crappy financial products.

    What will probably happen is that this will encourage people to not contribute to retirement accounts because now we’ll get a wave of finance writers noting the change and only quoting the highest possible tax loss in the most sensational language possible. Kind of like the new medicare surcharge on investment income.

    • retirebyforty April 19, 2013, 10:01 am

      I don’t think most people would even care about this cap. I’m not sure I follow your logic about discouraging people to save for retirement.

  • anon e. mouse April 19, 2013, 1:26 am

    Several points:

    1. The cost of an annuity will fall as rates rise. We are currently in an historically low rate climate. If this passes, expect that $3M figure to drop when rates rise.

    2. While the 401k limit is $17,500, employers of course can also contribute and often do. A 50% match will get you up to $26,250.

    3. Your employer may also have a profit sharing program

    4. As you point out, the limit for qualified plan contributions is $51,000. If your employer’s plan is set up correctly, you can in fact hit this, with the excess beyond your 401k contribution being an after-tax contribution which can then roll directly into a Roth IRA.

    5. If this passes, it will be a huge incentive to favor a Roth 401k over a traditional 401k.

    So it’s quite possible under realistic rate scenarios for a moderately compensated employee to hit the proposed tax preferred account savings limit.

    I’ve been maxing my 401k contribution since I started working. My investments are conservative (vanguard target retirement funds). After about 16 years in the workforce, my tax preferred account balance is around $425,000. My wife’s balance is approximately the same. I don’t know whether Obama’s proposal will combine balances for married folks? I hope not.

    Also, I’d just like to point out that whether $205,000 is plenty or not is a very subjective question. I’m not particularly keen on bureaucrats deciding how much is enough for me.

    • retirebyforty April 19, 2013, 9:59 am

      Thanks for your input. I forgot to include the employer matching. I would love to know which employer match 50%. My old company contribute only 6-8% and they said that’s already above average.

      5. You can also convert to Roth as you near the cap, right? It’s probably better to do it sooner than later if this proposal gets through.

      I still don’t how this would hit regular employee. The stars will all have to align and you employer would have to really love you.

      Great job with your retirement saving! It’s still a long way off from $3 million so you have plenty of work to do. Good luck! 🙂

      • anon e. mouse April 19, 2013, 8:31 pm

        Intel’s 6% contribution is 6% of your base salary, not 6% of your 401k contribution. Most employers match as a percentage of your 401k contribution, and 50% is generous, but not that rare.

        Intel’s 6% contribution however can easily exceed 50% of the maximum 401k contribution for a mid-level engineer. So it’s not at all unusual to get a 401k + profit sharing contribution approaching $25,000 – $30,000.

        Agreed that it is unlikely to hit $3M. But $3M is *not* the relevant number.

    • jim April 19, 2013, 10:07 am

      “it’s quite possible under realistic rate scenarios for a moderately compensated employee to hit the proposed tax preferred account savings limit.”

      I’d say its pretty unusual and quite unlikely. Based on the fact that only 0.03% of all IRAs have such a balance, seems its not at all typical.

      • anon e. mouse April 19, 2013, 8:22 pm

        Again, .03% of all IRAs have such a balance in our /current low rate environment/. The $3M figure is variable and will go down as expected rates of return increase.

        In addition, keep in mind that it is only recently that 401k contribution limits have increased substantially.

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