by Gerald E. Scorse / September 10th, 2018
It’s no secret that the federal government needs more revenue going forward. Congress could put the Treasury on autopilot to raise billions (and ultimately tens of billions) year after year. Guided by fairness, it could enact spend-down rules for non-retirement accounts that mirror those for retirement accounts: at age 70 ½, require minimum distributions and tax all gains at ordinary income rates.
Let’s look first at the tax policy drawn up by lawmakers to govern the original individual retirement accounts (IRAs) in 1974. Then let’s see how the same policy points to duplicate rules for regular, non-retirement holdings.
Congress gave generous tax breaks to IRAs all through the build-up years. In fact, they’re tax-free, starting with contributions and including realized and unrealized capital gains, capital gains distributions, and dividends. If markets rose (a solid long-term bet), compounding would add hugely to the value of the breaks.
On the back end, legislators turned the accounts into a fair and far-sighted bargain. They elected to tax all withdrawals as ordinary income—including the capital gains, normally taxed at much lower rates (currently 15%). Under this mandate, taxes that were forgiven all along are continually recouped at ordinary income rates as retirees cash in.
So it is that IRAs, 401(k)s and the like yield tens of billions in federal income taxes every year—all of which is actually…