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
Letters
Open Letters:

Ref. : Letters to the editor

Health Care & Environment

08.28 Pesticides Killing Bees: Study Shows What 'Everybody's Suspected'

08.28 Gun Control: Where Each of the Presidential Candidates Stands [an IQ test]

08.28 The Raging Future of American Wildfires

08.28 The day we stopped Europe’s biggest polluter in its tracks

08.28 The key to water security could be lurking in a New Mexico sewage farm

08.28 Digging into big coal's climate connections

08.28 Texas teenager creates $20 water purifier to tackle toxic e-waste pollution

08.27 DOE Attempts to Jump-Start Concentrated Solar

08.27 The Drought Isn't Just a California Problem

08.26 Lord Stern hits out at claims about cost of climate cuts

08.26 New Orleans launches resilience roadmap to tackle climate and social challenges [What could go wrong...]

08.26 Marcy Borders, 9/11's 'dust lady', dies of stomach cancer

08.25 The Weight of the World

News Media Matters

Daily: FAIR Blog
The Daily Howler

US Politics, Policy & 'Culture'

08.28 America’s Great Infrastructure Stagnation

08.28 Gun violence in America, in 17 maps and charts

08.27 4 Reasons Why a Biden Run Would Help Sanders

08.27 Watch Poverty in School Districts Escalate Before Your Very Eyes [interactive map]

08.27 Why Louisiana Fought Low-Income Housing in New Orleans After Katrina

08.26 The Florida Republicans Who Couldn't Draw a Map

08.26 3 reasons Bernie Sanders is now the Democratic front-runner

08.26 Bernie Sanders is wrong about the Koch brothers: They’re even more dangerous than he thinks

08.26 An ugly new frontier in GOP race-baiting: Attacking the Asian menace [1:01 video]

08.26 Why America Needs a Slavery Museum [6:31 video]

Justice Matters

08.28 Future Jails May Look and Function More Like Colleges

08.28 The Case Against Cash Bail

High Crimes?

08.27 Mustard gas 'likely used' in suspected Islamic State attack in Syria

08.27 Tolerant and multicultural, Palmyra stood for everything Isis hates

Economics, Crony Capitalism

08.25 The Emerging-Market Currency Rout

International

08.28 Rx for Prosperity: German Companies See Refugees as Opportunity

08.28 Vietnam to free 18,200 prisoners in amnesty, but no political activists

08.28 Japanese police bracing for gang war as Yamaguchi-gumi mafia group splits

08.28 Migrant crisis: up to 200 dead after boat carrying refugees sinks off Libya

08.28 Hungarian police arrest driver of lorry that had 71 bodies inside

08.27 Mass Migration: What Is Driving the Balkan Exodus?

08.27 The Big Dig

08.27 Rape, ignorance, repression: why early pregnancy is endemic in Guatemala

08.27 Denmark reveals €800m tax fraud – the country's biggest

08.26 Poland drought: Jewish tombstones and fighter plane uncovered as rivers run dry

08.26 Assad 'confident' of Russian support for Syria regime

08.26 Ready for Take-Off: China Steers Course Between Prestige and Profit

08.26 Ready for Take-Off: China Steers Course Between Prestige and Profit

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: