13 Aug Could Congress abolish the Roth IRA?

Q. Is it possible that Congress could abolish the Roth IRA? I heard this from a rather informed person and hope he is wrong.
— Hoping not

A. This is speculation, and we’d love to know where your friend heard this.

It’s certainly something that would trouble a lot of investors.

Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton, said she doesn’t think the Roth IRA will be abolished, but that doesn’t mean Congress won’t make changes to how it works.

She said Roths have gotten a lot of attention since a recent ProPublica report that revealed there were more than 3,000 people in 2019 with Roth IRAs worth $5 million or more.

For example, the report said that Peter Thiel, PayPal’s co-founder and a tech entrepreneur, had a Roth IRA worth $5 billion.

Sen. Ron Wyden said rich investors have been able to “game the rules to get ahead and basically abuse taxpayer-subsidized accounts with pricey accountants and lawyers. This increases the already existing retirement inequality between retirement haves and have-nots to an extreme level.”

“Roth IRAs were designed for middle income Americans, not the uber wealthy,” Kane said.

There are income limits to contribute to Roth IRAs.

You can contribute $6,000 per year plus a $1,000 catch-up contribution if you’re over 50. Those who are married filing jointly can contribute if income is below $198,000, and the contribution limit is phased out between 198,000 and $208,000 of income. You can’t contribute if you have more than $208,000 in income, Kane said.

She said Roth IRAs are a fantastic savings vehicle because you contribute after-tax dollars and the money grows tax-free for the rest of your life.

“It’s a win-win for the saver and the U.S. government,” she said. “The saver pays the taxes today and never has to pay taxes on that money ever again. The government gets the taxes today. Those tax dollars are helping fund government expenses being incurred now.”

That compares to a traditional IRA, where your contributions grow tax-deferred. The IRS only gets its money when you take it out at some point in the future, she said.

Kane used a farming analogy.

“Would you rather pay taxes on the seed or the crop?” she said. “Paying taxes on the seed is what you do with the Roth IRA. Paying taxes on the crop is what you do with the traditional IRA.”

She said Roth IRAs and Roth 401(k) plans are popular saving vehicles. There is a bill currently in the House Ways and Means Committee — Securing a Strong Retirement Act of 2021 — that would encourage Americans to save more and make it easier to do so.

“The bill wants to increase the types of accounts to allow Roth contributions to include SEPs and SIMPLE IRAs,” she said. “It also recommends allowing the option for employers to provide matching contributions on a Roth basis vs. pre-tax as are allowed today.”

If the government is concerned about higher earners taking advantage of Roth IRAs, they could eliminate the back door IRA.

“This is where you make a traditional IRA contribution. You then convert the traditional IRA into a Roth IRA,” she said. “You pay taxes on the amount you convert so the government gets their tax dollars. However, this is a way to allow higher earners to get around the income restrictions.”

It could also decide to limit contributions to a Roth IRA if the account value is too high, she said.

“Congress also might impose Required Minimum Distributions on Roth IRAs or include Roth IRA distributions in modified adjusted gross income when calculating taxes on Social Security benefits, or a Medicare premium surtax,” she said.

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This story was originally published on Aug. 13, 2021.

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