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Tax-deferred retirement accounts were created under a law passed by Congress in 1974. They strike a bargain between taxpayers and the Treasury: money in the accounts grows tax-free, but taxable withdrawals must be taken yearly after age 70 1/2.

Both sides win. Roughly half of all Americans have gotten a jump on financial security, and now hold trillions in retirement savings. On its part, the Treasury gets an annual influx and is nearing demographic gold: the first baby boomers reach required distribution age in 2016, and a mother lode of retirement taxes should start streaming in.  

Congress, though, has proven more than willing to help the affluent slip away from the tax payback. Two examples are the late-December renewal of a 2006 Bush tax break, and a one-year suspension of minimum required distributions.  

The starkest instance—and the most costly for the Treasury—stemmed from the financial meltdown. With portfolios plummeting, Congress rushed to freeze mandatory withdrawals for 2009. Only the haves stood to gain. Anyone who actually needed the distribution had to take it and pay taxes; the haves took a pass and saved thousands.

The stock market recovered and the suspension was allowed to lapse. Nobody should expect an encore, but the precedent has been set.

As the clock ticked down on 2010, the lame-duck Congress passed an extension of the Bush tax cuts for the wealthiest two percent of Americans. Along with it, fitting right in, came a one-year renewal of the IRA charitable deduction.

It allows holders of Individual Retirement Accounts (IRAs) to give up to $100,000 of their annual required distribution to charities. No federal or state taxes are paid. In addition, because the money doesn’t count toward income on tax returns, high-income filers could avert hikes in Medicare premiums. According to one estate attorney, the bill is “good for about 10 different [tax avoidance] reasons.”

What we have here is a siphoning away of public revenue to private charity. Money may go to good causes, but the transfer violates the payback half of the retirement bargain. In effect, the money is being stolen from the U.S. Treasury (and from every state that has an income tax).

Donors have their hearts in the right place and the law behind them. Charities are thrilled. The thieves are in Congress, always ready to jigger the tax code on behalf of the well-off.

Withdrawal formulas also stiff the Treasury by keeping a tight lid on required withdrawals. The formula that applies to most people calls for a starting minimum required distribution of under 3.7 percent. The rate rises annually, but ever so slowly; 25 years later, at age 95, the required distribution is still only 11.6 percent. The formulas don’t overtly discriminate, but they heavily favor those in no need and no hurry. So-called stretch IRAs, an estate planning tool, can string out distributions—get ready now—into the next century.  

Brokerage houses distort the tax payback in their own way. They’re making billions on retirement accounts, but they continually bash required distributions. A Fidelity advisory, for example, told clients that at 70 1/2 they’re “required to start raiding” the accounts.

Raiding? Not exactly. Minimum distributions mean it’s time to start paying back Uncle Sam for decades of tax deferral. Even after federal and state taxes, affluent Americans over 70 1/2 are likely looking at annual payouts in the healthy five figures. Whatever the number, it got there with a long tax-free ride.

How about a little gratitude. And instead of robbing Uncle Sam, let’s have more sensible and equitable distribution rules from Congress.

-30-

(If you have the time and are so inclined, email this to your Senators and Representative.)  

Originally posted to Gerald Scorse on Wed May 04, 2011 at 06:36 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  how about (7+ / 0-)

    not smearing seniors with terms like 'robbing' for doing things that are completely legal.

    Blame Congress if you want for allowing it, not the people for making use of the laws.

  •  Also Roth IRA Loophole (0+ / 0-)

    People with higher incomes (over $150,000 I think) can't contribute to a Roth IRA, where the distributions are not taxable under most scenarios.  BUT

    One of the Bush tax cuts was to eliminate the ban on converting traditional IRAs to Roth for those with high incomes.  So, now you can contribute to a traditional IRA on Wednesday, and on Thursday convert it to a Roth.  No tax on the conversion, since it was probably non-deductible anyway.  No gain to tax, since it's only in the traditional for 1 day.  And now it's in a Roth IRA, to grow tax-free forever.

    Where is the lobbyist for the middle class?

    •  Roth IRA's still pay tax. (1+ / 0-)
      Recommended by:
      nextstep

      They're after-tax accounts, so all money going into a Roth IRA has already been taxed.  You can only contribute $5k to an IRA per year, so the maximum you could put in an IRA then convert to Roth in a single year would be $5k.

      Still, it's tax money the government is getting now rather than later.

      •  Roth IRAs (1+ / 0-)
        Recommended by:
        Odysseus

        You say that Roth IRAs "still pay tax". Yes and no. They pay ordinary upfront taxes, but nothing afterward. You can't really compare a tax-free Roth with a tax-deferred 401(k), 403(b), etc. Roths pay tax only on the contributions; other retirement accounts pay tax both on the contributions and the gains.

        •  Yes and no (5+ / 0-)

          Assuming equal marginal tax rates at time of contribution and time of withdrawal, the ratio of tax payments between tax deferred and Roth is the same as the gains.  To illustrate, two scenarios:

          1) Guy A has a 25% marginal rate and contributes $100 to a 401k, pretax.  His investment doubles twice, growing to $400 at withdrawal, at which point he pays $100 in tax and keeps $300.

          2) Guy B has a 25% marginal rate and contributes $75 to a Roth IRA and pays $25 in tax.  His investment doubles twice, growing to $300 at withdrawal, on which he pays no taxes.

          In either case, he's got the same amount at withdrawal.  The main question is whether or not the government did something with the money that was sufficiently useful or effective to match the rate of return he got on his investments.

          •  As a matter of fact, for most people (1+ / 0-)
            Recommended by:
            Odysseus

            the "upfront" tax rate would be higher than the tax rate at retirement. Most people's retirement income is well less than half of their working income, putting them in a lower tax bracket.

            Your analysis is spot on. There is no advantage to a Roth IRA or Roth 401k. You pay now or you pay later. It's the same.

            •  the advantages come with the different (1+ / 0-)
              Recommended by:
              MGross

              rules, rather than a specific net return number. Roths are much more flexible because the contributed dollars are after-tax.

              And people can be driven into a higher-than-expected tax bracket by the minimum withdrawals from ordinary IRAs and 401ks when they kick in, so the retirement tax rate isn't always simple to predict.

              The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis. --Dante Alighieri

              by uffdalib on Wed May 04, 2011 at 12:00:54 PM PDT

              [ Parent ]

              •  Also, you can effectively put more in a Roth. (1+ / 0-)
                Recommended by:
                MGross

                One can contribute $5,000 total to IRAs, traditional or Roth (or both).

                But, the Roth IRA contribution is after taxes while the traditional is pre-tax.  Assuming one contributes the maximum, one can effectively put more in the Roth because the taxes have already been paid with non-IRA money while for the traditional IRA part of the contribution is needed to pay future taxes.

                Of course, there are numerous other factors involved in choosing between a Roth IRA and a Traditional IRA that one must consider.

                Republican Platform = Fear, Anger, and Hate. Oddly their God preached against those very traits.

                by TexDemAtty on Wed May 04, 2011 at 12:22:59 PM PDT

                [ Parent ]

            •  You Have No Clue (1+ / 0-)
              Recommended by:
              tcdup

              It is not the same.  

              With a ROTH IRA, your money Grows TAX FREE FOREVER.  Do you understand the concept of Compound Interest?

              If you put in $5,000 2 years in a row you will have $10,000 total.  

              Yes your income that you put into this is already taxed and taken out of your paycheck.  So lets say your taxes were 25%.  25% of $10,000 is $2,500.

              So you had to make $12,500 in order to put $10,000 into a ROTH IRA.  

              If you make 10% interest a year (yes this is possible, without being a trader, and includes any fees) in 40 years you will have $450,000 which you can take out tax free.

              If it was taxed, say again at 25%, you would end up paying over $110,000 in taxes, instead of $2,500 now.

              So no it is not the same.

              •  You forgot to discount the future value of the (0+ / 0-)

                tax.  But more importantly, where the hell are you getting a 10% rate of return that isn't extremely risky?  Sign me up!

                •  S&P 500 (0+ / 0-)

                  The S&P 500 itself averages over 10% a year.  

                  If you want something simple, choose a brokerage that uses no load mutual funds (no upfront fees for opening and dumping money in an account).

                  Open a Roth IRA and choose the S&P 500 Index Fund.

                  Dump $5000 (or as much money into it each year that you can) every year, no matter what the stock market is doing (this is called dollar cost averaging) and you will make out just fine by the time you want to retire if you are young enough.  

                  This is the simplest way to get 10% interest a year or close to it.

              •  I get it, do you? (0+ / 0-)

                In fact, it is the same, if we presume that one is using the same pretax income numbers (i.e. $5000 pre-tax for deductible vs $5000-tax for Roth).  In that case, your numbers are:

                Traditional: $10,000*1.1^40=$452593 pretax
                452593-113148=$339445 post tax.

                Roth: $10000-$2500=$7500 Roth
                $7500*1.1^40=$339444 post tax (rounding error)

                You are correct that you can "hide" more money in a Roth than in a traditional account by putting in an equal amount of post-tax money, but many people have access to a 401k at work.  In the case of a traditional 401k, the "hiding" effect of a Roth IRA doesn't kick in until a far higher amount, since Roth IRA and 401k contributions are fungible if you're taxed equally when paying in and taking out, as we've just shown.

                The only difference, as I mention lower down, is if we're talking about someone using a "backdoor Roth" (i.e. contributing to a nondeductible Traditional IRA and immediately converting to Roth) in order to circumvent the Roth income limit.  

          •  Taxes on Roths v. taxes on other accounts (2+ / 0-)
            Recommended by:
            PennsylvaniaProgressive, tcdup

            Taxes on Roths will not equal taxes on other retirement accounts.

            Starting in 2010, Roth conversions became available for the first time to high income Americans. There was (and still is) a rush to convert. How come, I wonder?

            Here's why:

            “Congress adopted the tax change in part as a fiscal gimmick. That’s because, within the 10-year budget window (all that matters in Washington accounting), the conversions raise revenue. At the time the law passed, CBO [the Congressional Budget Office] figured it would generate about $6.5 billion from 2010-2015. But in 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.” (Keep in mind: that’s the toll just for conversions).

            The quotes are from Howard Gleckman, editor of Tax Vox, a blog operated by the Tax Policy Center in Washington, D.C.

            •  The nature of IRAs (0+ / 0-)

              Because the traditional IRA, if you can't deduct the contribution (which, if you have access to a 401k at work has a relatively low limit), is an inferior product to a 401k or deductible IRA.  With a deductible IRA or 401k, the numbers would be as I had above:

              1) Guy A has a 25% marginal rate and contributes $100 to a 401k, pretax.  His investment doubles twice, growing to $400 at withdrawal, at which point he pays $100 in tax and keeps $300.

              With a Roth IRA, the numbers would be as I had above:

              2) Guy B has a 25% marginal rate and contributes $75 to a Roth IRA and pays $25 in tax.  His investment doubles twice, growing to $300 at withdrawal, on which he pays no taxes.

              With a traditional, non-deductible IRA, the results would be like this:

              3) Guy C has a 25% marginal rate and contributes $75 to a Roth IRA and pays $25 in tax.  His investment doubles twice, growing to $300.  When he makes his withdrawal, he gets the principal tax free ($75), and then has to additionally pay taxes on the gains, so he pays $56.25 in taxes and keeps $168.75, for a total of $81.25 paid in taxes and $243.75 for himself.

              That's why people are rushing to convert.  You said that

              You can't really compare a tax-free Roth with a tax-deferred 401(k), 403(b), etc. Roths pay tax only on the contributions; other retirement accounts pay tax both on the contributions and the gains.
              , but you can.  What you cannot compare a Roth to is a traditional, non-deductible IRA (this is also true of 401k contributions above $16,500, which some employers allow, and for which one pays tax before those contributions go in as well as when you withdraw gains).
    •  Roth IRA loophole (0+ / 0-)

      A piece that I wrote made prominent mention of this. It ran as an op-ed in the Los Angeles Times on April 10 under the headline: Roth IRAs: a real 'fiscal Frankenstein'. It got picked up by lots of newspapers and web sites after that. You might be interested; it'll come right up on Google (or whatever).

  •  What do you propose for a distribution? (1+ / 0-)
    Recommended by:
    JLan

    My grandmother lived to be 103. Assuming I still have money left in my Roth IRA at 92, taking out 11.6% might seem like too much since I might live another 10 years.

    Without a crystal ball to know when a person is going to die, it had to write the law to make for a fair distribution schedule.

    •  Roth IRA has no min. withdrawals (0+ / 0-)

      because you contributed after-tax money and the withdrawals of contributions and growth (subject to a couple of rules) are not taxable, so the Treasury doesn't care whether you ever take the money out.

      The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis. --Dante Alighieri

      by uffdalib on Wed May 04, 2011 at 11:53:25 AM PDT

      [ Parent ]

    •  also, considering the non-Roth case, (1+ / 0-)
      Recommended by:
      craiger

      required withdrawal doesn't mean you have to spend the money. If you have to take out more than you want to spend, you put the extra in a taxable account so you have it when you need it.

      The darkest places in hell are reserved for those who maintain their neutrality in times of moral crisis. --Dante Alighieri

      by uffdalib on Wed May 04, 2011 at 11:55:15 AM PDT

      [ Parent ]

    •  Isn't that 11.6% of what's left in the account? (0+ / 0-)

      In other words, if  every year you take 11.6% out of the remaining balance, you could live to be 966 year old and you would still have somethihng left in the account. You will never run out.

    •  Distribution rates (0+ / 0-)

      Of course it's difficult, but rates do have to be set. They were considerably higher at the beginning; lobbying took care of that.

  •  IRAs were sold as great idea for everyone (0+ / 0-)

    But in the case you are going to save any way, isn't it better to pay the 15% tax on dividend/cap gain when you withdraw than the 28% on common income.  I figured out a few years ago I was better off with assets in non-IRA accounts.  
    Another thing is you can have tax witheld when you take an IRA distribution.  So in December I take a distribution (instead of paying estimated tax 4 times a year.)  IRAs are okay if you would have a big drop in income when you retire and expect to be in a substantially lower tax bracket.  But, for me, I want my assets  less encumbered by withdrawal rules and tax liabilities.  

  •  I had a tax deferred retirement account and paid (0+ / 0-)

    almost 20% of it in taxes because I retired "early"...our retirement age was 60 because of the stressful conditions of our work (in a state mental hospital) and I retired a bit more than 3 months before my 60th birthday.

    I also paid well over $4,500 in income tax on 2010...am I the onl retired person supporting the Federal Government?
    No wonder they are in debt...I have no problem paying what I owe, but I want the REALLY RICH to pay a fair share as well.

    mark

    Retired AFSCME Steward and licensed gun carrying progressive veteran.

    by old mark on Wed May 04, 2011 at 02:15:22 PM PDT

    •  The really rich (2+ / 0-)
      Recommended by:
      ybruti, cameoanne

      "I want the REALLY RICH to pay a fair share as well."
      If only. One way to move in that direction is equal taxes on capital gains, dividends and ordinary income such as wages--a step recommended both by Obama's debt commission and by the Rivlin/Domenici group. We haven't had equal taxes on income from wealth and income from work since (hold on now) Reagan's Tax Reform Act of 1986.  

      •  What a shock...I am still amazed that anyone (0+ / 0-)

        actually thought Reagan was presidential material...I didn't believe it when he was elected Governor of California!
        But he had very rich backers supporting him and guiding him through politics, and he wa affable and a good speaker and would do anything they told him to...

        and now he is "beloved"...

        mark

        Retired AFSCME Steward and licensed gun carrying progressive veteran.

        by old mark on Thu May 05, 2011 at 10:05:38 AM PDT

        [ Parent ]

  •  I just have a quick ? (0+ / 0-)

    Is this how most people that call themselves liberal look at things? I'm really dismayed by the last paragraph that refers to robbing uncle sam. Since when is keeping more of my money robbing someone or something else? is that really the way liberals look at things?

    It's not the size of the dog in the fight, it's the size of the fight in the dog.

    by AKA potsi on Wed May 04, 2011 at 06:08:31 PM PDT

    •  The common good (0+ / 0-)

      There is such a thing as the common good, and it isn't always the same as what's good for me personally. I do not speak, nor would I ever pretend to, for "most people who call themselves liberals." I speak for myself.

      Uncle Sam, in the article, is the common good. What's happening, in the article, goes against the common good.

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