Newspaper logo  
 
 
Print view: Roth IRAs Painting the Treasury Red
TAXING MATTERS:

Roth IRAs Painting the Treasury Red

by Gerald E. Scorse
Why should Roths pay taxes only on contributions, while all the other retirement accounts pay on capital gains as well? Why should the others require distributions, but not Roths?

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.

There are no such downstream revenues from Roths. Capital gains are permanently tax-free, creating Treasury shortfalls that erase and ultimately far outstrip the initial boost. There are no required distributions (which might at least spin off some revenue). Losses from Roths grow endlessly; the only question is how large the final numbers will be. Such are the accounts that Congress has chosen to promote—most directly to the affluent, whose incomes once barred them from owning Roths.

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 them, but are 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.


© 2014 Gerald E. Scorse. Gerald E. Scorse helped pass the bill requiring basis reporting for capital gains. He writes articles on tax policy.



Copyright © 2014 The Baltimore News Network. All rights reserved.

Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.

Baltimore News Network, Inc., sponsor of this web site, is a nonprofit organization and does not make political endorsements. The opinions expressed in stories posted on this web site are the authors' own.

This story was published on Mary 14, 2014.

 
Local News & Opinion

Ref. : Civic Events

Ref. : Arts & Education Events

Ref. : Public Service Notices

Travel
Books, Films, Arts & Education

10.01 The war on high-school history classes is a whole new level of dumb

09.30 30 Years of Coens: Inside Llewyn Davis

09.29 Naomi Klein: Fossil Fuels Threaten Our Ability to Have Healthy Children

Letters
Open Letters:

Ref. : Letters to the editor

Health Care & Environment

10.01 Celiac Disease, a Common, but Elusive, Diagnosis

10.01 Ebola Outbreak in Nigeria Appears to Be Contained

09.30 Yes, the Health Care Industry Is Conspiring to Steal Your Money

09.30 Beyond GMOs: The Rise of Synthetic Biology

09.30 The Berlin Patient and the Mysterious Cure for HIV

09.30 Can Narendra Modi bring the solar power revolution to India?

09.30 Earth lost 50% of its wildlife in the past 40 years, says WWF [related photos]

09.29 MIT's new cement recipe could cut carbon emissions by more than half

09.28 Germany’s Grass-Roots Energy Revolution [6:00 video]

09.28 Interview with Ebola Discoverer Peter Piot: 'It Is What People Call a Perfect Storm'

09.28 We Can Transition to 100% Renewable Energy Starting Today

09.28 Study predicts California will use only renewable energy by 2050

News Media

09.29 Political TV Ads Will Soon Reach Facebook-Level Creepiness

09.29 ANATOMY OF A NON-DENIAL DENIAL

Daily FAIR Blog
The Daily Howler

Justice Matters

09.30 States Take the Lead on Sexual-Assault Reform

09.28 Iceland: Bankers Convicted, Unemployment Down

09.26 For Oil and Gas Companies, Rigging Seems to Involve Wages, Too

US Politics, Policy & Culture

10.01 As PayPal Spins Off, Apple Pay Signals New Era at Cash Register

10.01 Lawmakers Rebuke Secret Service Chief Over White House Breach

10.01 California Will Allow Family Members to Seek Seizure of Guns

10.01 The US military is as unequal as America. Want a fair fight? Reinstate the draft

09.30 Searching for the Good Life in the Bakken Oil Fields

09.29 GWU students tackling income inequality in their own backyard

09.29 Failing the Midterms

09.29 “Not the true Republican Party”: How the party of Lincoln ended up with Ted Cruz

09.27 ALEC Exodus!

High Crimes?
Economics, Crony Capitalism

10.01 Arkansas Internet Law Gouges Schoolkids

10.01 8 disturbing ways the Kochs have amassed their fortune

09.29 Grossly Distorted Procedures: Mish Proposal to Raise GDP Calculation

09.28 German Central Bank Head Weidmann: 'The Euro Crisis Is Not Yet Behind Us'

09.27 Inside the New York Fed: Secret Recordings and a Culture Clash

09.27 Taliban Storm Afghanistan, Beheadings Galore

09.27 Europe’s Austerity Zombies

09.26 G.O.P. Error Reveals Donors and the Price of Access

International

09.30 One of America's Most Famous Slow-Food Chefs Says Farm-to-Table 'Doesn't Really Work'

09.30 "When We Felt Threatened, We Opened Umbrellas and Raised Our Hands"

09.30 Gitmo hunger strikes are a cry for help. Why is the US fighting back with secret torture?

09.29 Obama’s Syria Strategy: Hit And Hope

09.29 Meet the Controversial Muslim Leader Who Has Advised the White House

09.29 Hong Kong Demonstrators Unveil 'Umbrella Revolution' [photos]

09.29 Hong Kong protests 'must go on' [3:00 drone video]

09.29 US-led air strikes pound Isis bases in Syria

09.28 Full Show: America’s New War in the Middle East [25:20 video]

09.28 The Syrian Front: Waiting to Die in Aleppo

09.27 How Israel Silences Dissent

We are a non-profit Internet-only newspaper publication founded in 1973. Your donation is essential to our survival.

You can also mail a check to:
Baltimore News Network, Inc.
P.O. Box 42581
Baltimore, MD 21284-2581
Google
This site Web
 


Public Service Ads: