The Individual Retirement Account, or IRA, has been one of the great policy successes of the past half-century. Introduced in 1974 as a backstop for workers whose employer-based retirement plans were vaporizing in a terrible economy, IRAs are now held by more than one-fourth of U.S. households. Assets total $12 trillion, more than half the nation’s GDP.
IRAs offer a tax break to encourage savings, which in turn provide capital for businesses to start and grow, adding to employment and prosperity. The IRA is a bipartisan program that’s worked.
But now, in a short-sighted and dangerous attempt to find revenues to help finance a multi-trillion dollar social welfare and climate mitigation package, some Democrats want to dismantle IRAs as we know them. Their plans to slap severe restrictions on retirement plans were passed by the House Ways and Means Committee in September and became part of Build Back Better legislation. As Congress continues debating whether these provisions will remain in the final bill or be stripped – it is important to consider negotiations are ongoing and nothing is locked in stone, yet.
Politicians are capitalizing on headlines about “massive IRAs of the superwealthy” – with emphasis on a single person whose investing acumen turned $1,700 into $5 billion.
But it’s the entire program that is subject to attack. With a traditional IRA, workers get a tax deduction when they make a contribution, and the value of assets – for example, stocks and bonds – accumulates tax-free until funds are withdrawn, starting at age 59 ½. With a Roth IRA, named for a Delaware Senator, there’s no tax deduction up-front — but no tax liability when funds are withdrawn later.
Starting in 2008, a holder of a traditional IRAs could roll investments into a Roth, incurring immediate taxes. Because people expect higher tax rates in the future, these conversions became popular, quintupling the overall value of Roth IRAs in a decade…Read more>>