The Wall Street Journal published an article online in October, which the writer described how Congress is scrutinizing large IRAs. The concern that Congress has is that some wealthy people are using IRAs in ways that were not intended when they were created. A traditional IRA provides an income tax benefit to the owner because contributions can be deducted from gross income, and the contributions (as well as the earnings on the contributions) continue to grow tax-deferred until retirement age. The owner of a traditional IRA does not have to make any withdrawals until reaching age 70 ½, and if the owner dies before reaching retirement age, his or her spouse can rollover the IRA into an IRA that is treated separately from the original owner’s IRA. Additionally, if the beneficiary designations are structured properly, the IRA distributions can be “stretched” to provide income tax benefits for children and grandchildren.
Why is Congress taking aim at IRAs? One possible reason is that the federal government has concerns about funding social security, and would like to get their hands on the tax revenue sooner rather than later. Traditional IRAs must be distributed to the owner beginning at age 70 ½, so the government will get its share of income tax eventually. (Note: Roth IRAs do not have mandatory distribution requirements, but the contributions are not tax deductible). Along those same lines, some wealthy people are putting large amounts of money into IRAs, which is reducing the federal government’s tax revenue. As an example, Mitt Romney allegedly has over $100 million in an IRA, which continues to grow each year free of income tax. However, unless he gives the proceeds to charity, his estate will ultimately pay estate tax on that amount (currently 40%), so the government will eventually get its “fair share”.
Nevertheless, Congress and the President are exploring the option of placing limits on IRAs. For example, the President would like to prohibit any further contributions to IRAs that have more than $3 million of assets. Additionally, Congress has been considering eliminating stretch IRAs, which would force an IRA to be distributed in a much shorter time period after the owner’s death. For now, it looks like IRAs are still a good option for retirement savings, but you should stay up to date on any restrictions that are placed on IRAs in the future.