Monday, April 08, 2013

Retirement Account Cap Will Limit Ability to Hedge Hyperinflation

The Administration's coming budget plan will cap the value of tax-advantaged retirement accounts at $3M.  It's too early to tell how the federal government will enforce this cap without seeing the enabling legislation.   I would have no objection if any excess value in a retirement account after the beneficiary's demise were subject to full taxation as part of an estate.  If the intent is to prevent retirement accounts from being abused as multigenerational tax shelters, this will prevent them from being passed to heirs in a tax-free status.  This idea has more immediate implications for investors than estate taxes.

My readers know that I expect a dollar devaluation and policy overreactions to launch hyperinflation in the U.S. at some point.  A tax-advantaged investment account would in theory allow the preservation of wealth during hyperinflation if its asset mix was heavily weighted toward hard assets.  Any cap on the account's value poses a complication.  If the cap is enforced only when distributions stop at death, it's not much of a concern.  If, however, the cap is enforced annually via a special tax, then the nominal value of the account will not rise above $3M in any given year.  This will pose a huge problem for investors positioning a portfolio for hyperinflation, because the real value of a hyperinflating currency will decline to the point where a nominal value of $3M is meaningless.

This proposed cap will pose a serious dilemma for investors who want to preserve their net worth during and after a currency crisis.  Holding an IRA that is forced to remain below a $3M ceiling will prove disastrous in a hyperinflated economy where a cheeseburger costs $3M.  Investors must now wargame scenarios that include the liquidation of an IRA as it approaches the $3M limit, the payment of a penalty, and the deposit of the remainder into a taxable portfolio (presumably also with a heavy hard asset weight) that so far is not subject to the same ceiling.  The point of such a mitigating move is to allow a hard asset portfolio to continue to keep pace with hyperinflation.

Caps and taxes on private retirement assets are a form of financial repression that keep redistributive entitlement programs fully funded.  Lazy people who did not save for the future think it's fair to take money via taxes from those who did save according to a plan.  This idea will make it much harder for makers and savers to keep their capital away from takers.