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Repeal Roth Retirement Plans to Increase National Savings

Roth IRA or 401(k) plans provide a tax exemption for profits generated under the plans. As much as $6,000 a year may be contributed to a Roth IRA, and as much as $22,000 a year may be contributed to a Roth 401(k). The author’s proposal would repeal the Roth plans to increase national savings. Roth plans have an ambiguous effect on private savings, because they can be funded with the addition or continuation of debt and because taxpayers reduce their savings in response to tax exemption for target avings, including savings for retirement. Roth plans also reduce federal revenue. Congress allowed taxpayers to convert to Roth plans starting in 2010, and it scored the conversions as producing federal revenue. A conversion from a regular plan to a Roth plan, however, is just a form of federal borrowing. Current cash to the government is offset by required revenue losses in the future. When taxpayers convert, they expect tax rates to go up or they have access to extraordinary returns, and the conversions are then an expensive and wasteful form of federal debt — unbudgeted and out of control.The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop proposals to raise revenue. The Shelf Project is intended to raise revenue without a VAT or a rate hike in ways that will improve the fairness, efficiency, and rationality of the tax system. Now is the time for congressional staff work to be done to prevent the impending revenue crisis.