The Roth IRA, created by Congress in 1997, resulted from “a conscious, contemptible manipulation of the budget rules.”
– John Buckley, former chief of staff for the Joint Committee on Taxation and former chief tax counsel, Committee on Ways and Means
What was true then is truer now. Roths have become a bipartisan affliction: They came in under President Bill Clinton, but Presidents George W. Bush and Barack Obama have added their own wrinkles. Thanks to all three, nobody has to go to the Cayman Islands to find a tax shelter; all they have to do is get their money into a Roth. Legislators continually dream up more ways to make it happen. Even the Internal Revenue Service (IRS) has become an enabler, issuing a ruling that creates one more route to a federally sanctioned tax haven.
On to that “conscious, contemptible manipulation of the budget rules.” What’s it about, and why are Democrats and Republicans alike only too happy to do it? It’s simple: All the money that goes into Roths is post-tax, not pre-tax, so the revenues from the accounts show up immediately. What don’t show up (but what start piling up from the beginning) are the deficits that Roths create. Fudging the numbers with upfront revenue can make budgets look good, but it’s all smoke and mirrors. The taxes on contributions are the only revenue that Roths will ever raise. Unlike other retirement accounts, Roths pay no taxes on capital gains; unlike other accounts, they will never pay back Uncle Sam for their tax-free growth.
Len Burman is the director of the nonpartisan Tax Policy Center in Washington, DC. He’s called Roth accounts a numbers game, “bringing in more now, but giving up much more in the future” via foregone revenues. As he sees it, “‘Passing on more financial problems to our kids is really irresponsible. We’re leaving them a weak budget situation to begin with. Cutting off a major source of revenue [taxes on retirement account capital gains] makes no sense.'”
None at all, and the accounts are inherently unfair as well.
Compare Roths to regular IRAs, 401(k)s, 403(b)s and all other retirement accounts. All except Roths ultimately pay tax both on contributions and capital gains. Roths pay no taxes on gains. All accounts except Roths require minimum distributions from age 70 and a half onward. It’s possible for Roths to be passed on, undistributed and tax-free, into the 22nd century.
In addition, the income limit that formerly kept the rich from having Roth accounts at all was removed by President George W. Bush (though the removal didn’t take effect until after he left office). Obama has made Roth moves as well. As part of the “fiscal cliff” deal in 2012, he opened the door to earlier conversions from regular 401(k)s to Roths. His new myRA accounts, set to debut by year’s end, are also Roths.
Taken together, all these steps are costing the Treasury untold amounts every year in lost revenue. The numbers can only grow larger, and add immeasurably to the federal deficit, as the years go by. Here, from an earlier piece, are three simple ways to rein in Roth losses:
Abolish conversions. The largest Treasury losses will come from the largest Roth accounts, i.e., conversions. Congress should call a halt to Roth conversions. At a minimum, it should restore the $100,000 gross income ceiling that kept Roth conversions out of the hands of the rich.
End Roth startups. Other retirement plans are genuine two-way bargains: Savers enjoy tax advantages, but repay the country via taxable distributions. Roths eat away at the United States’ fiscal future, taking ever-bigger bites as more accounts come on-stream. The second reform, just as important as the first, is to stop opening new Roth IRAs.
Require distributions. Minimum distribution requirements – standard on all other retirement plans – have never applied to Roths. Accounts created under the “fiscal cliff” agreement were set to require distributions, and Congress should extend the rule to all Roths. Tax-free payouts could pump extra money into the economy, and give governments at all levels a chance to recoup at least some of their lost revenues.
Roth accounts were a deception from the start, and everybody knew it. It’s time for the elephants and the donkeys to do the right thing: to hit the brakes on the Roth blunder.
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