The Meretricious Myth of Roth IRAs
By Robert S. McIntyre and Gerald E. Scorse, Progressive
Charlestown guest columnists
Meretricious means “based on pretense, deception, or insincerity.” That makes it the perfect word to describe the creation and spread of Roth individual retirement accounts (IRAs), especially the claim that they’re a plus for the Treasury. Just the opposite: the initial boost from Roths is largely a ruse, and the accounts in fact are a fiscal train wreck.
Let’s see what gives the myth a veneer of truth, why it
persists, and what needs to happen to stem the losses that Roths are inflicting
on the Treasury—and will be inflicting for decades.
The deception began at the beginning. When lawmakers
created Roths in 1997, they got around the budget rules by counting incoming
revenue but ignoring lost revenue. They counted the upfront tax on Roth
contributions, but not the uncollected taxes on the back end.
There are no taxes
on Roth distributions, and no mandatory distributions at all. Contrary to the
myth, the design of Roths effectively guarantees that the Treasury will lose
money. Over the last several years, thanks to repeated cases of “pretense,
deception or insincerity,” the Treasury’s downstream Roth losses have risen by
the tens of billions.
The George W. Bush Administration made the costliest Roth change, removing the income limit for Roth conversions. Conversions turn other retirement accounts into Roths, and were originally limited to persons with adjusted gross incomes under $100,000. Now they’re open to anybody, even the super-rich.
Unlimited conversions were justified, with a straight face,
as a revenue windfall for the Treasury. Converters to Roths have to pay taxes
on their previously untaxed holdings (both contributions and gains), so the
Treasury stood to get an upfront lift. Everybody knew, though, that the ink
would ultimately turn deep red.
Here’s Howard Gleckman, underlining the point
on the blog Tax Vox when the change first took effect: “But in the long run,
turning billions of dollars from tax-deferred to tax-free savings will be a
huge loser for Treasury. My colleagues at Tax Policy Center figure that,
through mid-century, allowing unlimited Roth conversions will reduce federal
revenues by $100 billion.”
The certainty of future losses hasn’t stopped Republicans
and Democrats alike, including President Obama, from embracing Roth accounts.
As part of the 2012 “fiscal cliff” budget deal, Obama opened the door to
immediate Roth conversions by accounts that previously couldn’t convert until
age 59½.
Once again, under the guise of raising revenue, Congress in fact set
up the Treasury for untold billions in downstream losses. A 2014 tax
reform plan drafted by Republican members of the House Ways and Means Committee
tilts even more strongly toward Roths: it would end regular IRAs, cut maximum
401(k) contributions in half, and direct any overages into Roths. In short,
mesmerized by the myth, policy makers have promoted a retirement account that
creates unlimited Treasury shortfalls.
The accounts are grossly unfair as well. Every other
retirement account is subject to minimum required distributions; only Roths are
not. Contributions to regular IRAs have to stop once mandatory distributions
begin. Roth contributions can continue as long as there’s earned income. There
are Roths with balances in the millions, tax-sheltered for decades to
come—first for holders, then for heirs.
Congress should call an immediate halt to Roth conversions,
the source of the biggest looming Treasury losses. It should also abolish
start-up Roth IRAs. Those two steps would end the influx of new Roths, but not
the ongoing damage from those already on the books.
Deep into the 21st century, even with reform,
the Treasury will still be paying by the billions for the meretricious Roth
myth.
McIntyre is the director of Citizens for Tax Justice,
Washington, D.C. He’s an expert on tax policy. Scorse helped pass the
capital gains basis reporting bill. He writes on taxes.
Copyright 2015 Gerald E. Scorse
