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Tuesday, March 27, 2012

How Congress Should Curb Roth IRAs

Forbes, Why--And How--Congress Should Curb Roth IRAs, by Deborah L. Jacobs:

Roth individual retirement accounts are the simplest, best tax planning tool around. ... But lately I’ve started thinking that Congress should seriously limit their use.

These are the main reasons why Roths are so great:

  • Although you pay income tax on the money as it goes into the account, doing that eliminates the requirement for you or your heirs to pay tax on future distributions. In other words, all future growth takes place inside a permanently tax-free wrapper.
  • With a Roth you avoid the requirement to take yearly minimum distributions starting at age 70 1/2, and that can leave more for beneficiaries if you don’t use the money yourself. ...
"Roths are really there for the big hitters — not for the common schlep who is going to have a hard time funding the IRA,” says John Buckley, former chief Democratic counsel to the House Ways and Means Committee, who is now a visiting professor at Georgetown University. ...

For people who’ve already set up Roths–and those who inherit those accounts–Congress shouldn’t change the rules. People have done their tax planning with these rules in mind. ...

Going forward, here are two changes that would make sense from both an economic and a tax policy perspective:

1. For new Roth IRAs, cap the amount that can accumulate in the account. Once the balance in the account reaches more than $10 million, IRA owners should be required to withdraw the excess on an annual basis and pay tax on the earnings at ordinary income rates.

2. Limit tax-free inherited Roth IRAs to $1 million per beneficiary, adjusted for inflation. Inheritors should be required to withdraw the excess on an annual basis and pay tax on the earnings at ordinary income rates.

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