Send a Tweet
Most Popular Choices
Share on Facebook 19 Share on Twitter Printer Friendly Page More Sharing
OpEdNews Op Eds    H4'ed 8/3/21

The real, untold story of Roth IRAs

By       (Page 1 of 2 pages)   3 comments
Become a Premium Member Would you like to know how many people have read this article? Or how reputable the author is? Simply sign up for a Advocate premium membership and you'll automatically see this data on every article. Plus a lot more, too.
Author 500743
Follow Me on Twitter     Message Gerald Scorse

Pre-tax and Post-tax Investments - Ways to save for retirement
Pre-tax and Post-tax Investments - Ways to save for retirement
(Image by aag_photos)
  Details   DMCA

The internet lit up when ProPublica broke the news about venture capitalist Peter Thiel and his "gargantuan tax-exempt piggy bank," a Roth retirement account worth an obscene $5 billion. Nobody said boo, though, about the story's opening words: "Roth IRAs were intended to help average working Americans..."

Well, boo and double-boo (the second for calling Roths "a humdrum retirement vehicle"). The idea that Roths were created for "average working Americans" is 100 percent fantasy and 110 percent naïve.

Roths in fact are a huge tax handout to the well-off. The accounts didn't even exist until 1998, almost a quarter-century after Congress first created Individual Retirement Accounts (IRAs).

A second, instantly popular retirement option, 401(k) accounts, appeared in 1981. Contributions to regular IRAs and 401(k)s are tax-free. Even more important, taxes on capital gains are deferred until withdrawals so compounding works its magic for decades. Within two years of their debut, "nearly half of all big companies were offering 401(k)s or were considering it."

So, putting it simply, "average working Americans" never had the slightest need for Roth IRAs. The accounts were always intended for the affluent, for people with no money worries. The retirement accounts of average Americans may be humdrum, but Roths are a golden exception.

The accounts do have a small disadvantage, but for Roth holders it doesn't really matter: there's no tax deduction for contributions. On the back end, it's made up for in spades with tax breaks that apply only to them.

The growth in the accounts is forever tax-free. All those capital gains, over all those years, go into their pockets (with not a penny going to the Treasury). Even more, there are no required minimum distributions for original owners and spouses who are sole heirs.

Roth rules are the exact opposites of those for all other retirement accounts. For millions of average working Americans with regular IRAs and 401(k)s, distributions are required and capital gains are taxed (at ordinary income rates, not the lower capital-gains rate.)

The payback rules were laid down by Congress to gradually recoup the tax revenues forgiven over the decades. The rules are nothing but fair. For Roths and Roths alone, no money ever has to be withdrawn and, when it is, it comes out tax-free.

While various rules initially limited the number of Roth accounts, President George W. Bush signed two bills that dramatically increased their use. The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed employers, starting in 2006, to offer Roth 401(k) plans as well as standard 401(k)s. Later, in a a blatant pitch to the rich, his Tax Increase Prevention and Reconciliation Act removed the $100,000 gross-income limit for Roth conversions. Starting in 2010, even the richest of the rich could switch into permanently tax-free Roths.

Conversions are paperwork transactions that turn regular retirement accounts into Roths. (Of course, another minor problem for the affluent--the taxes on the converted amounts have to be paid first.)

President Obama drank the Roth Kool-aid as well. As part of the 2012 "fiscal cliff" budget deal, he opened the door to immediate Roth conversions by accounts that previously couldn't convert until age 59-1/2.

Roths have constantly been promoted as a revenue plus for the Treasury: retirement accounts built up on taxable (instead of deductible) contributions. To tax experts Len Burman and Howard Gleckman, the rationale never held water; instead it holds a continuously rising sea of federal red ink.

Here's Gleckman, for instance, on the consequences of Roth conversions by the wealthy: "[I]n the long run, turning billions of dollars from tax-deferred to tax-free savings will be a huge loser for Treasury. My colleagues at Tax Policy Center figure that, through mid-century, allowing unlimited Roth conversions will reduce federal revenues by $100 billion."

Burman was still seething long after the conversion rule took effect. It was, he wrote, "a truly horrible, idiotic, counterproductive idea." All the same "it's the law of the land, proving that a policy that makes a lot of rich people even richer... can be irresistible to lawmakers."

Next Page  1  |  2

(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).

 

Well Said 2   Supported 2   Valuable 2  
Rate It | View Ratings

Gerald Scorse Social Media Pages: Facebook page url on login Profile not filled in       Twitter Page       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

Gerald E. Scorse is a freelance writer living in New York. His op-eds have appeared in newspapers across the United States

Go To Commenting
The views expressed herein are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.
Follow Me on Twitter     Writers Guidelines
Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
Support OpEdNews

OpEdNews depends upon can't survive without your help.

If you value this article and the work of OpEdNews, please either Donate or Purchase a premium membership.

STAY IN THE KNOW
If you've enjoyed this, sign up for our daily or weekly newsletter to get lots of great progressive content.
Daily Weekly     OpEdNews Newsletter
Name
Email
   (Opens new browser window)
 

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

What Donald Trump did to me

Our counterfeit Social Security crisis

One Tax Policy Americans "Yugely" Favor

The IRS deserves cheers, not jeers

The book that uncovered 'wealthfare'

Dad's Turn to Do the Family Planning

To View Comments or Join the Conversation: