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 News & Opinion

Ref. : Civic Events

Ref. : Arts & Education Events

Ref. : Public Service Notices

Travel
Books, Films, Arts & Education

11.19 How DNA Is Reshaping How We See Ourselves—and Our History

11.18 Lobbying Used to Be a Crime: A Review of Zephyr Teachout’s New Book on the Secret History of Corruption in America

Letters
Open Letters:

Ref. : Letters to the editor

Health Care & Environment

11.24 Vancouver Experiments With Prescription Heroin

11.24 The Downside of the Boom

11.24 World bank to focus future investment on clean energy

11.23 The Piecemeal Assault on Health Care

11.23 NRG Seeks to Cut 90% of Its Carbon Emissions

11.23 Stampeding Black Elephants

11.20 CO2 emissions must be zero by 2070 to prevent climate disaster, UN says

11.20 UK pledges £720m to climate change fund for poor countries

News Media

11.24 Are Americans “Stupid” or Uninformed?

Daily FAIR Blog
The Daily Howler

Justice Matters

11.22 Suffer Little Children

11.21 Icelandic bankers jailed for reckless loans made before crash

11.20 Stripping Neighbors of Money: Pressure Mounts for EU Crackdown on Tax Havens

11.19 Horrific stories about Bill Cosby were out there for years. Why are we only now listening to these women?

US Politics, Policy & Culture

11.24 The politics of infrastructure [video w/ads and transcript]

11.23 Grenade launchers, armored personnel carriers, and a military-grade helicopter among the lethal arsenal of police force who helped patrol Ferguson [photos]

11.22 Immigration Enriches You and Me

11.22 The United States of Thanksgiving [Interactive: click '+' sign for full recipes]

11.21 Ferguson Protests Are Coming to Your City

11.21 The U.S. government thinks China could take down the power grid

11.21 Obama on immigration: 'We are and always will be a nation of immigrants'

11.19 Hillary’s Silence on Iran and Immigration Reform

11.19 America Is the Developed World's Second Most Ignorant Country

11.19 Imperfect Union: The Constitution Didn't Foresee Divided Government

11.19 Senate Republicans block landmark NSA surveillance reform bill

11.19 Senate rejects Keystone XL pipeline bill (For Now) [Related 'Cowboys and Indians' alliance]

High Crimes?

11.22 Senate Democrats Clash With White House on C.I.A. Torture Report

Economics, Crony Capitalism

11.23 Top incomes soared as tax rates fell

11.23 Full Show: How Public Power Can Defeat Plutocrats [25:25 video and transcript]

11.22 Bill Black: Why the New York Fed Isn’t Trustworthy

11.22 Elizabeth Warren Blasts New York Fed President William Dudley [12:53 video]

11.22 Attorneys General for Sale

11.20 WSJ Reports: Bank of North Dakota Outperforms Wall Street

11.20 Elizabeth Warren Blasts FHFA’s Mel Watt: “You Haven’t Helped a Single Family” [5:23 video]

International
US air strikes in Syria driving anti-Assad groups to support Isis

11.24 'Mumbai is on the verge of imploding'

11.24 Israeli cabinet approves legislation defining nation-state of Jewish people

11.21 We need a new law to protect our wildlife from critical decline

11.20 Putin's Reach: Merkel Concerned about Russian Influence in the Balkans

11.20 The 'Caliphate's' Colonies: Islamic State's Gradual Expansion into North Africa

11.20 Amnesty report reveals desperate plight of Syrian refugees in Turkey

11.20 Teeth and Bones: Mass Abduction Reveals a Decaying Mexican State

11.19 3rd Possibility: Coming Civil War in West Bank/ Jerusalem?

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: