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Study Considers US IRA Reform

by Mike Godfrey, Tax-News.com, Washington

02 October 2013


As one of a series of papers analyzing and reviewing tax breaks as part of any package of United States tax reforms, the Committee for a Responsible Federal Budget (CRFB) has looked at the preferential tax treatment given to Individual Retirement Accounts (IRAs).

The CRFB firstly pointed out that the various types of IRAs, in general, allow people to make tax-deferred contributions into special accounts designated for retirement. They hold more than 25 percent of all US retirement assets, and allow contributions to effectively be paid with pre-tax dollars, with taxation of this contribution – along with any gains, dividends or interest – deferred until the account-holder withdraws the funds at retirement.

However, according to the Joint Committee on Taxation, all IRAs together will cost only USD15bn in lost income tax revenue in 2013, or more than USD250bn over 10 years, much smaller than many of the other large preferences for retirement savings. The tax exclusions for Social Security benefits and defined benefit plans will each cost about twice as much at USD33bn in 2013. The exclusion for defined contribution plans will cost almost four times as much at USD57bn this year.

According to the Employee Benefit Research Institute, 16.6m individuals have over USD1.4 trillion invested in IRAs, but, in 2009, only 5 percent of workers made a contribution to an IRA.

Higher-income workers are more likely to have them: over 30 percent of workers with family incomes above USD75,000 have an IRA, compared with less than 10 percent for families making under USD10,000. IRAs also provide greater benefits to individuals at higher income levels who are able to save more.

Although many taxpayers have substantial assets built up in retirement accounts, the CRFB also pointed to studies that have indicated that many of these taxpayers would have saved anyway, suggesting that the tax break is providing an unnecessary subsidy.

It noted that opponents to the tax break point out that, "while encouraging retirement savings is a laudable goal, current retirement incentives are poorly targeted and yield limited returns. They are a vehicle for wealthy individuals to convert a substantial share of their taxable assets into tax-free retirement assets."

Many tax reform plans have therefore, the CRFB said, proposed suggestions that would incorporate features that would incentivize better retirement habits for a broader portion of the population, such as auto-enrollment plans and contributions that grow as workers near retirement.

"Tax reform," the CRFB concluded, "offers an opportunity to simplify retirement provisions, improve saving incentives, and raise revenue to reduce tax rates, reduce the deficit, or both."

A comprehensive report in our Intelligence Report series titled "The Lowtax International Pensions Report" which has an in depth view on The Mechanics of Pensions Provision, 'High-Tax' Country Pension Regimes and 'Lowtax' Jurisdictions In Which To Locate Pensions Savings, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report14.asp
TAGS: individuals | tax | tax incentives | retirement | social security | United States | tax breaks | tax reform | individual income tax | Retire | Retirement | Tax

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