Heirs of IRAs must take distributions and pay taxes on them, though currently the payments can be stretched over a long period. A five-year limit would make the accounts less attractive for heirs because the distributions are taxed as ordinary income and the tax hit would come much sooner, said Suzanne Shier, director of wealth planning and tax strategy at Chicago-based Northern Trust Corp.

“It’s shifting the economics if you don’t have the extended payout,” she said.

Traditional Accounts

People may look instead to save in traditional investment accounts where long-term capital gains are taxed at lower rates than ordinary income, she said.

IRAs have evolved from a retirement-planning technique into an estate-planning tool for some wealthy families. The issue gained attention during the presidential campaign last year when Republican nominee Mitt Romney disclosed that his IRA held between $18.1 million and $87.4 million, and at one time the maximum value exceeded $100 million.

The budget’s proposed cap on retirement savings would apply to the total of an individual’s tax-favored accounts including IRAs and 401(k)s. It would be reached by barring taxpayers from adding more tax-free money once the limit is reached. Sponsors of retirement plans and IRA trustees would report each participant’s account balance as of the end of the year.

Roth IRAs

The limit would be set starting at $3.4 million, the amount needed to fund a $205,000 annual annuity for a 62-year-old, and be indexed for inflation. Balances from Roth IRAs and the value of defined benefit plans would count toward the cap, said a Treasury official who briefed reporters on the condition of anonymity.

Less than one percent of Americans age 60 or older had combined 401(k) and IRA balances totaling $3 million or more as of year-end 2011, according to the Washington-based Employee Benefit Research Institute.

The budget plan also reprises many of the administration’s proposals including a 28 percent cap for high earners on the value of tax breaks such as the mortgage interest deduction, retirement contributions and municipal bond interest.