November 8th, 2016 and
the Politics of IRAs.
You and other voters will go the voting
booth on November 8th, 2016.
IRAs are political because they are a
created by the federal income tax laws.
IRA owners receive tax preferences for
making various types of IRA contributions
or because the IRA has received a
direct rollover or rollover contribution
from a 401(k) plan or another employer
sponsored retirement plan.
The federal deficit is a political issue
waiting to be addressed. More and more
politicians are starting to seriously look
at IRAs and 401(k) plans as sources of tax
revenues. Money in traditional, SEP and
SIMPLE IRAs is tax deferred, it is not tax free.
When distributed or withdrawn, the
distribution amount must be included in
the recipient's income and tax paid at
the person's applicable marginal income
There is approximately 7.2 trillion dollars
in traditional IRAs. Assuming an
average marginal tax rate of 20% the federal
government is looking to collect 1.4
trillion dollars from future IRA distributions.
There is approximately 6.8 trillion
dollars in 401(k) and other defined contribution
plans. Assuming an average
marginal tax rate of 20% the federal government
is looking to collect 1.3 trillion
dollars from future 401(k) distributions.
The federal debt is estimated to be 19.5
trillion dollars as of September 30, 2016.IRAs and 401(k) plans cover 13.8% of the
The question is, when will these tax
revenues be collected?
Some politicians are starting to suggest
the IRA rules need to be changed so the
federal government starts to collect tax
revenues sooner than under existing law.
Senator Ron Wyden represents the
State of Oregon. He is a Democrat. There
is a 50% chance he will become the
chairman of the Senate Finance Committee
in 2017 after the November 8th elections.
He recently communicated that he
and other Democrats will be pursuing the
following IRA law changes.
With respect to inherited IRAs, the 5-
year rule would apply once an IRA
owner dies. This would be a monumental
A traditional IRA beneficiary would
have 5-6 years to take distributions,
include such amounts in income and pay
tax. The ability to stretch out distributions
over the beneficiary's life expectancy
would be repealed.
A Roth IRA beneficiary would lose the
right to have the Roth IRA earn tax-free
income for a period equal to his or her
life expectancy. The beneficiary would be
given only 5-6 years of tax-free income.
- It is unclear if everyone would lose
the right to make Roth IRA conversion
contributions or if a person with traditional
IRA funds could make a conversion
contribution but only to the extent
the IRA funds are taxable. That is, a person
with basis in his/her IRA or pension plan could not convert any basis. The Obama administration
has previously proposed not allowing basis within
an IRA to be converted. A total repeal of the right to
make a Roth IRA conversion contribution would be radical.
At least on a short term basis, the federal government
likes it when individuals make Roth IRA conversion
contributions as tax revenues are collected.
3. There would be a new tax rule stipulating that the
maximum value of a person's Roth IRAs would be limited
to $5,000,000 and if this limit was exceeded then
the excess would have to be withdrawn. This also
would be a radical change.
- A non-IRA change would be to change the law governing
401(k) plans. Somehow a person making student
loan payments would be given credit under their 401(k)
plan so that the loan payments would be treated as an
elective deferral contributions so that an employer
would have to make a matching contribution.
In summary, IRAs are political. As with other political
subjects, each person will need to make their own voting
decisions. Taking away IRA tax preferences is in
essence a tax increase and individuals will need to
decide the degree it will influence how they will vote.
We at CWF believe switching to the 5-year rule for an
inherited IRA beneficiary should be unacceptable.