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02.23 BREAKING: Exxon to Leave Up to 3.6 Billion Barrels of Tar Sands/Oil Sands in the Ground [Yay!]

02.23 Lancet Study on Life Expectancy by 2030 Confirms Poor US Performance

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02.23 The Case for a Fracking Ban

02.22 Federal judge blocks Texas attempt to defund Planned Parenthood

02.22 'Medicare for All' Only Way for Trump to Keep Healthcare Promises

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02.25 Wanted: Three Principled Republicans to Save America From Trump

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02.25 Donald Trump vows to 'get the bad people out' of US – as it happened

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02.24 'I was naive': after losing healthcare battle, factory workers fear next blow [4:38 video; sociopathic CEOs don't care about workers]

02.24 Islamophobia grows louder in North Carolina: 'Can we not kill them all?' [sociopathic groups uniting in hate]

02.23 Why Kansas' Fiscal Implosion Is Bad News for Trump ["Stupid is as stupid does." – Forrest Gump]

02.23 “Donald Trump makes Mexicans not important”: Sen. Tom Cotton faces angry constituents at town hall meeting

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02.25 White House confirms conversation with FBI about Trump and Russia

02.24 New Law Would Let Arizona Treat Organized Dissent as Organized Crime [to suppress non-fascists only, perhaps?]

02.24 French human rights 'at tipping point' as state of emergency continues, says Amnesty International

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02.22 Palestinians must hang on to the green line, whether the aim is two states or one [We mustn't let fear trump morality]

02.22 EUROPE’S CHILD-REFUGEE CRISIS [We mustn't let fear trump morality]

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  Print view: IRA Sweet Spot Could Lift America
FISCAL ANALYSIS:

IRA Sweet Spot Could Lift America

by Gerald E. Scorse
The boomers’ decades of tax deferral are ending, and decades of minimum required distributions are about to begin.

Congress realizes that Medicare and Social Security lie directly in the path of a demographic tsunami. The first wave of baby boomers has already filed for benefits, and alarm bells are sounding on the Potomac.

But a little-noticed fiscal windfall kicks in just ahead. Starting in 2016, untold tax dollars will come streaming into the Treasury as boomers begin taking minimum required distributions (MRDs) from their retirement accounts. Legislators should speed up the distributions, and dedicate the proceeds to shoring up America’s safety net.

The inflow traces back to the 1974 Congressional act that set up individual retirement accounts (IRAs). Numerous offshoots have been added, such as 401(k)s and 403(b)s, but the essentials remain what they were at the start. Contributions are tax-free and gains are tax-deferred. Withdrawals can begin at age 59½; they must begin at age 70½ and continue every year thereafter. Withdrawals, including capital gains, are taxed at ordinary income rates. (Roth IRAs, which have different rules, don’t figure in here.)

The creation of IRAs was a political tour de force that served high social purpose, made economic sense, and appealed to separate self-interests. Through IRAs, the federal government offered millions of American workers their best chance ever to put away some money for the Golden Years. It was money that would let them live a little, not just get by on Social Security. What the government gave up in tax concessions, it could recoup on the other end: a continuous influx of extra revenue, topping off the glow of having done right by the country.

Corporate America cheered for its own reasons. Companies with defined-benefit pension plans quickly realized that defined-contribution IRAs gave them a less expensive way to offer a substitute benefit. Companies lacking pensions suddenly had a retirement plan as well, and it included the allure of potential stock market riches. Wall Street saw green. IRAs promised millions of new customers, endlessly handing over new money.

Now the boomers’ decades of tax deferral are ending, and decades of MRDs are about to begin. As usual the devil is the details, and the details will pack real punch once the paybacks start. Here are three revenue-generating MRD proposals:

Set an earlier MRD date. There’s no good reason to start MRDs at age 70½. A meaningful start date would be age 65: when Medicare begins, so should the tax deferral payback. Congress acted a generation ago to protect Social Security by raising the retirement age in stages; today’s Congress should act to help preserve Medicare by lowering the MRD start date, in stages, to age 65.

Adjust withdrawal rates. The starting MRD for most IRAs is less than 3.7 percent. Twenty-five years later, at age 95, it’s just 11.6 percent. Congress should set the first-year MRD at 5% and recalibrate the rates going forward. Uncle Sam, generous all along, has strong grounds to accelerate account payouts. This step could be made progressive by keeping the current rates for balances below, say, $250,000.

Abolish “stretch IRAs”. Several-generation transfers, now permitted, can extend MRDs into the next century. Passing along wealth is fine, but tax-sheltered retirement accounts shouldn’t become tax avoidance tools. Set a two-generation limit, or a date-certain limit, after which balances must be distributed and taxes paid.

The beauty of these ideas is that they raise revenue without raising taxes. They’re a stimulus as well: all the revenue comes from putting more income in taxpayer hands sooner. Money would flow in not only from boomer MRDs, but from all accounts taking minimum payouts.

President Obama has often called for shared sacrifice. Few would find it easier than those with retirement accounts who willingly waive withdrawals until required, and then take only what they must.


Gerald E. Scorse helped pass the bill requiring basis reporting for stock market capital gains. He writes articles on taxes.



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This story was published on December 18, 2012.

 

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