Congress gives IRA perks to high earners in tax bill

A retirement bill that passed the House on Tuesday delivers valuable breaks for wealthy taxpayers while papering over long-term revenue losses.

The Secure 2.0 Act, which is not yet slated for a vote in the Senate, pushes back the age at which the government can start taxing retirement accounts from 72 to 75, providing high-income earners an extra three years to defer tax payments and enjoy tax-free growth. 

To make up for the loss of revenue, the plan uses what critics call an accounting trick.

The House-passed bill counts money collected by the government through taxes on Roth retirement accounts earlier to make up for the lost revenue on traditional accounts in the 10-year budget window.

However, the change will add to the deficit unless a future Congress acts down the road.

“It’s going to bring revenue in now because folks are paying tax immediately on contributions treated as Roth rather than being provided an immediate deduction on a traditional account, but on the other side, when you withdraw from a Roth that has earnings, those earnings aren’t being taxed,” Garrett Watson, an analyst at the Tax Foundation, a right-leaning think tank, said in an interview. “And so further down the line, especially after the 10-year budget window, that’s going to have a negative impact on revenue.”

With Roth IRAs, people pay taxes when they contribute to their plans, but nothing when they take out funds. With traditional plans, taxes are paid upon withdrawal, so the switch under the new bill will lead to a short-term boost in government revenue but a long-term loss.

Assuming tax rates remain the same, there’s no difference in the amount of tax that is paid between Roth and traditional retirement plans, only the timing as to when that tax is paid. So using the new payment schedule to justify a tax cut and keep government revenue neutral over the next decade doesn’t hold water, critics say.

“One should immediately be skeptical of a provision where the giveaway has to be hidden, has to be papered over by this accounting trick,” University of Chicago law professor Daniel Hemel said in an interview.

While three extra years of tax-free growth may sound attractive to taxpayers, the reality is that most Americans start using their retirement savings well before they turn 75, which means the exemption will be useful mostly for people who don’t have to live off their retirement plans in old age.

“The vast majority of retirees take distributions at younger ages, not because the law requires it, but because they need the money to live on,” analyst Howard Gleckman of the left-leaning Tax Policy Center wrote in a March 24 brief.

Another provision in the bill would increase the additional amount that older workers can deposit into their retirement plans to reap the tax benefits, boosting the cap from $6,500 to $10,000.

“It goes without saying that those who can afford to make $10,000 in additional contributions to their retirement plans have high incomes,” Gleckman wrote.

Wall Street financial planners, who make money in the form of fees levied on these plans, are unsurprisingly cheerful at the prospect of having more capital under their control. Lisa Featherngill, a wealth planner at Comerica Bank, described the provisions in the bill as “really exciting” in an interview with The Street.

More than a dozen financial firms, including Wall Street behemoth Blackrock, which oversees more than $10 trillion in public pensions and other forms of institutional assets, released statements endorsing the bill upon its passage in the House.

The bill does include provisions that are geared toward middle-income taxpayers, notably an auto-enrollment mandate for employer-based retirement plans and an expansion of the savers’ tax credit, a $1,000 tax credit for low and moderate earners.

“Too many workers in this nation reach retirement age without the savings they need. In fact, about 50 percent of households are at risk of not having enough to maintain their living standards in retirement,” House Ways and Means Committee Chairman Richard Neal (D-Mass.) said on the House floor. “We need to do more to encourage workers to begin planning for retirement earlier.”

But the few middle-class encouragements like the ones passed in H.R. 2954 are a stalking horse, analysts say, for a long-term agenda of expanding subsidies available to high-income earners.

Over the past 25 years, “legislation has repeatedly raised the statutory limits on contributions and benefits for retirement plans and IRAs, delayed the start of required distributions, and weakened statutory non-discrimination rules — all to the benefit of affluent workers and the financial-services companies that collect asset-based fees from retirement savings,” Michael Doran, a law professor at the University of Virginia, wrote in an academic paper earlier this year. 

“The result has been spectacular growth in the retirement accounts of higher-income earners but modest or even negative growth in the accounts of middle-income and lower-income earners,” he wrote.

Hemel, of the University of Chicago, offered a similar assessment on Twitter, writing that the current bill contains “just enough small potatoes for less wealthy taxpayers (e.g., promotion of savers’ credit) so that lawmakers can stand up & say they delivered for workers” while actually being “a deeply cynical deficit-expanding giveaway to high-income taxpayers disguised as a set of budget-neutral middle-class savings incentives.”

Both Republican and Democratic lawmakers don’t see it this way, casting the increased age requirements in the light of changing demographics and financial habits.

“It used to be 70, then it was moved to 72, now it’s been moved to 75,” Rep. Joseph Morelle (D-N.Y.) said after the House vote. “I think it’s just an indication of people living older. I think the important thing here again is to try to have us as policymakers continue to try to have individuals be mindful of retirement needs.” 

Rep. Kevin Brady (R-Texas) said in a statement that the new age requirements for distributions were “especially important because many workers find themselves making more at the end of their careers and are open to focusing on retirement.”

The House vote could be a precursor to initiatives in the Senate, where similar bills have support from both Democrats and Republicans. A spokesperson for Senate Finance Committee Chairman Ron Wyden (D-Ore.) said that no time frame for a vote on retirement packages had been set yet and that the Senate would likely have its own markup. 

The House bill only had only five nay votes, all from Republicans: Reps. Dan Bishop (N.C.), Andy Biggs (Ariz.), Thomas Massie (Ky.), Chip Roy (Texas) and Tom McClintock (Calif.).

Every Democrat present in the House backed the bill in the 414-5 vote.