Rich people's rip-off
By Gerald Scorse, Progressive Charlestown Guest Columnist
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| You can even get this shirt on Amazon. Wonder if it was Jeff Bezos' idea |
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withdrawn—and when it is, it comes out tax-free.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 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.