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.

 
Local Gov’t Stories, Events

Ref. : Civic Events

Ref. : Arts & Education Events

Ref. : Public Service Notices

Travel
Books, Films, Arts & Education
Letters

Ref. : Letters to the editor

Health Care & Environment

06.28 US, Canada and Mexico pledge 50% of power from clean energy by 2025

06.28 How the London Array blows away the competition in green energy

06.28 69m children will die of preventable causes, says Unicef

06.27 This City Is Home to 820 Urban Farms and Quickly Becoming America’s Urban Ag Capital

06.27 Global air pollution crisis 'must not be left to private sector'

06.26 New pain drug being developed at University of Maryland could offer relief without addiction [a non-addicting, legally prescribed opioid drug would greatly reduce crime and and improve public health]

06.26 German government agrees to ban fracking after years of dispute

06.26 Coal-Plant Retirements in New England Have ‘Opened the Door’ for Alternatives

06.24 UK's out vote is a 'red alert' for the environment

06.24 66 million dead trees in California could fuel 'catastrophic' wildfires, officials say

06.22 Republicans Offer a Plan to Replace Obamacare

06.22 Women Take Over the Family Farm

06.22 Our new alliance unites 600m city dwellers in fight against climate change

06.22 California's last nuclear plant to close amid longstanding earthquake concerns

News Media Matters

Daily: FAIR Blog
The Daily Howler

US Politics, Policy & 'Culture'

06.28 Donald Trump’s campaign looks more like a con every day. The press should cover it accordingly

06.28 The Clinton Campaign Is Obstructing Change to the Democratic Platform

06.27 Fear, loathing and firearms: sensory overload inside the NRA's Mall of Death

06.27 Cracks deepen inside troubled marriage of Trump and Republican party

06.27 Decrying 'Jim Crow 2.0,' Advocates Demand Updated Voting Rights Before Election

06.27 Landmark Survey Finds Special Interests are Pouring Money into Local Elections

06.27 Betraying Progressives, DNC Platform Backs Fracking, TPP, and Israel Occupation

06.26 Mapping the Rise of Anti-LGBT Legislation on the First Anniversary of Nationwide Marriage Equality

06.26 Draft of Dems' policy positions reflects Sanders' influence

Justice Matters

06.28 Clinton hails Texas abortion decision a 'victory for women', Trump stays silent

06.24 Experts ask for new investigation into disappearance of 43 Mexican students

High Crimes?

06.21 THE SHADOW DOCTORS

Economics, Crony Capitalism

06.26 Coal Industry on the Brink in Arizona, Colorado, New Mexico and Utah

International

06.28 Farc rebel leader: ‘We repent everything, not just the war’

06.28 Kenya clamps down on journalists covering war on al-Shabaab

06.28 Family rifts over Brexit: ‘I can barely look at my parents’ [since the EU break-up–'said' by vote–won't actually occur for 2 years, why not have a make-up EU vote to reverse the horrible consequences?]

06.28 After a campaign scarred by bigotry, it’s become OK to be racist in Britain

06.27 First ship sails through newly expanded Panama canal

06.27 Post-referendum chaos shows the inadequacy of our political class

06.27 $4 Indian smartphones 'will ship this week'

06.27 AFGHANISTAN’S THEORIST-IN-CHIEF

06.26 What's the British Equivalent of 'Moving to Canada'?

06.26 BREXIT MAKES THE U.S. THE LAST, BEST HOPE FOR LIBERALISM

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: