Roth IRAs Painting the
Treasury Red
By Gerald E. Scorse,
Progressive Charlestown guest commentator
Imagine the government
pushing a retirement plan that’s guaranteed to raise the federal deficit.
Imagine that the same plan inherently favors the already-favored.
Far from
imagining, you’re describing Congress’s growing embrace of Roth individual
retirement accounts (IRAs).
The lure of Roths is the
upfront revenue they bring in. Contributions to Roths are after-tax, unlike the
pre-tax contributions to regular IRAs, 401(k)s, and other traditional plans. In
fact Roth accounts are costing the Treasury billions upon billions. Let’s see
what drives the losses, and why they’ll be climbing far into the future.
All the money in retirement
accounts gets preferential tax treatment going forward. Capital gains grow
untaxed, lifting balances year after year. Traditional accounts pay the country
back through taxable withdrawals—voluntary starting at age 59 1/2, mandatory at
age 70 1/2. The inflows to the Treasury square the books on a win-win bargain:
decades of tax-free growth for retirement savings, coupled with decades of
growth in downstream tax revenues.
The red ink has effectively
been flowing ever since the accounts were created in 1997. It turned a deeper
red when Congress did away with the $100,000 adjusted gross income limit for
Roth conversions. These are paperwork transactions that turn regular IRAs into
Roth IRAs. To do this, account holders first have to pay the taxes on the
converted amount. The tax bill discourages conversions—but for the well-off,
not so much. Investment giants Fidelity and Vanguard reported conversion
bonanzas when the income limit came off in 2010.
Roth conversions were back
again as part of the 2012 “fiscal cliff” budget deal. The agreement opened the
door to immediate conversions by 401(k)s and the like; until then, holders
couldn’t convert to Roths before age 59 1/2.
Earlier this year, the
Republican majority on the House Ways and Means Committee unveiled the most
sweeping tax reform plan in a generation. It makes the first direct attack on
traditional accounts, and would sharply increase Roth ownership. It would
prohibit any further contributions to regular IRAs. It would limit annual
contributions to other traditional accounts to $8,750, half the current
maximum; contributions over $8,750 would be channeled into Roth accounts.
The
income limit for start-up Roths would disappear, just as it has for
conversions. According to the GOP plan, these changes would raise about $160
billion over the period 2014-2023. The number is just the latest Roth
hocus-pocus: the losses would eventually swamp the apparent gain.
It’s good to help workers
save for retirement, as traditional accounts have been doing since the
mid-1970s. In contrast, Roths are no help for those who need it but a windfall
for those who don’t. They cost the Treasury untold billions. They’re also
plainly unfair: why should Roths pay taxes only on contributions, while all the
other accounts pay on gains as well? Why should the others require
distributions, but not Roths?
Howard Gleckman edits
TaxVox, the blog of the nonpartisan Tax Policy Center. In 2010, with Roth
conversions booming and talk of more Roths already in the Capitol air, he
flashed a warning signal: “This infatuation with all things Roth bears close
watching.”
The infatuation keeps
growing, and the red ink just keeps rising.
Gerald E. Scorse helped pass the bill requiring basis
reporting for capital gains. His articles on tax policy have appeared in
newspapers across the country.
_______________
"For stocks, mutual
funds and bonds...Congress now requires brokerages to report the basis of these
investments, a reform wrought partly after my reporting on this issue and the
work of others, including Gerald Scorse, who pressed this issue with
lawmakers.” – pp. 271-2 of the David Cay Johnston book, The Fine Print.
© 2014 Gerald E. Scorse
Note: This piece
originally appeared in The
Hill.