The news has been aglow lately with reports from Cyprus, a country that wasn't even on most Americans’ radar a month ago.
News outlets are reporting on a government seizure of some of the assets in Cypriot banks. Americans might wonder, “If this could happen in Cyprus, why not at home?”
While I would love to say that something of this magnitude could never happen in the U.S., I have learned over the past few years to never say never.
The Cyprus government first decided that due to a massive shortfall in its funding, it would need to tax the entire deposits of its banking industry by up to 10 percent. This sent shock waves around the world, due in part to the fact that many overseas investors maintained deposit accounts in Cyprus.
The idea of losing 10 percent of your “safe” money is a harrowing though, one that American investors probably consider out of the realm of possibility.
Cyprus then froze all the assets for fear of a run on the banks. This occurs when the majority of depositors look to withdraw their money all at the same time. If that were to happen, the effects could be so severe that banking institutions could collapse.
Most recently, the Cypriot banks have allowed investors to withdraw €300 a day, regardless of how large the account may be. Again, these limits are imposed to prevent a run on the banks.
Could this happen here? Anything is possible.
A more likely scenario that I could see occurring is Congress simply raising the income tax rate. Then, instead of having to worry about losing a percentage of your bank deposits, you'd face losing more of your retirement accounts’ value (as many are taxed when liquidated). The net effect could potentially be much worse.
The idea that our hard-earned and saved retirement dollars could be at risk should frighten us. If Congress were to raise the income tax rates by a few points, we could be out more money not only today but also during our retirement years.
If you ask me, when it comes to my IRAs, I am more concerned about Congress than I am about our banking industry.