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 May 14, 2014.

 

03.26 Natural gas leaks from power plants, refineries, 100 times greater than thought

03.25 THE PLANT NEXT DOOR

03.25 Colorado Youth Score Decisive Legal Victory Against Fracking Industry

03.25 Keystone XL: Trump issues permit to begin construction of pipeline ["Stupid is as stupid does." –Forrest Gump]

03.25 Rotavirus vaccine could save lives of almost 500,000 children a year

News Media Matters

03.27 PBS is the only network reporting on climate change. Trump wants to cut it

Daily: FAIR Blog
The Daily Howler

US Politics, Policy & 'Culture'

03.29 With House Vote, GOP Puts Your Personal Online Data Up for Sale [not just loss of privacy, its new data gathering that could be used to hurt you]

03.29 Soybeans could surpass corn plantings amid solvency concerns for US farmers

03.29 America has never seen a party less caring than 21st-century Republicans [an immoral, sociopathic focus]

03.29 America's deportation squads want to expel our neighbours. We are saying no

03.28 The Feuding Kleptocrats

03.28 Trump signs four bills to roll back Obama-era regulations

03.28 A white supremacist slew a man in Manhattan. Why is the president silent?

03.28 Is the US facing an epidemic of 'deaths of despair'? These researchers say yes

03.28 The Trump Administration’s War on Science

03.27 How the Disappearing Middle Class Threatens Our Democracy [Citizen's United ruling is ruining America]

03.27 How the Disappearing Middle Class Threatens Our Democracy

03.27 'Whoa, Whoa, Whoa': Sanders Says Democrats' Intransigence Is Solution, Not Problem [videos]

03.27 The DLC Lives: "Third Way" Democrats Are Trying to Push the Party Rightward

03.27 Donald Trump's dizzying Time magazine interview was 'Trumpspeak' on display

03.27 Protesters target Connecticut's uber wealthy with 'tax bills' in bid to end loophole

03.27 'People aren't spending': stores close doors in 'oversaturated' US retail market

Justice Matters

03.29 HOW THE WHITE HOUSE AND REPUBLICANS BLEW UP THE HOUSE RUSSIA INVESTIGATION [FBI's investigation continues (until AG Sessions figures out a way to stop it?)]

03.24 TRUMP’S RUSSIA PROBLEM IS FAR FROM MARGINAL

High Crimes?

03.29 Spanish court to investigate Syrian 'state terrorism' by Assad regime

03.26 Iraq suspends Mosul offensive after coalition airstrike atrocity

03.25 The US Is Bombing Syria So Much That Watchdogs Can't Keep Up

03.25 Mosul's children were shouting beneath the rubble. Nobody came

Economics, Crony Capitalism

03.29 Richard Posner: “The Real Corruption Is the Ownership of Congress by the Rich”

03.25 Wall Street First

03.23 Bank that lent $300m to Trump linked to Russian money laundering scam

International

03.29 Donald Trump, Lost in Africa

03.29 An Unholy Alliance

03.29 Millions are on the brink of starvation in east Africa. We must act fast [food delivery is very difficult]

03.29 Broken promises for the children of Bangui abused by peacekeepers

03.29 'They take us very seriously now': how co-operatives could take back Kampala [organized co-ops could raise employment wherever corporations won't invest]

03.28 Negotiations to ban nuclear weapons begin, but Australia joins US boycott

03.27 Two Years of Uncertainty: Europe Prepares for Tough Brexit Negotiations

03.27 Left Behind: Germany's Race to Catch Up in the Startup World

03.27 A Wounded Metropolis: London in the Age of Terror and Brexit

03.26 Foreign companies flock to build nuclear plants in the UK [what could go wrong?]

03.26 Congolese militia decapitates more than 40 policemen as violence grows

03.26 Africans are rising - we can hold our leaders to account and build a better kind of future

03.26 Rise of Hindu ‘extremist’ spooks Muslim minority in India’s heartland

03.26 Marine Le Pen and Emmanuel Macron face off for the soul of France

03.26 'A runaway crisis': Argentina activists aid shanty towns state has left behind

03.26 In war-scarred Gaza, water pollution behind health woes

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: