Democrats Target Retirement Savings in Tax-and-Spend Package

The Democrats’ socialist tax-and-spend package is over 2,000 pages and contains billions of dollars in tax increases that will harm working families in the form of higher prices, lower wages, and fewer jobs.

The Democrats’ package is also taking aim at the financial security of Americans with changes to individual retirement accounts (IRAs). While the Left claims these restrictions are being made in the name of “fairness” they will just punish Americans saving for retirement.

A Roth IRA is a type of individual retirement account where someone contributes money that has been taxed before it enters the account. This allows contributions to the account to grow tax-free. After an individual has reached the age of 59 and a half, and once the account has been open for five years, an individual can withdraw the funds tax-and penalty-free.

The Democrats’ bill prohibits contributions to a traditional or Roth IRA if the total value of an individual’s IRA plus defined contribution accounts exceeds $10 million. 

The bill would also create a new required minimum distribution (RMD) for taxpayers with more than $10 million in their account. Specifically, the account holder would have to withdraw 50 percent of accounts above $10 million at the end of any taxable year and 100 percent of funds exceeding $20 million. Currently, RMDs only exist based on an individual’s age, not the size of the account.

Individuals often decide to convert their retirement savings from a traditional IRA to a Roth IRA so that they can withdraw the funds tax-free. The other benefit of converting to a Roth IRA is that there are no RMDs during an individual’s lifetime, whereas a traditional IRA has RMDs every year after an individual reaches the age of 72 (70 and half if an individual turned that age before 2020).

Under the Democrats’ bill, taxpayers would also be prohibited from converting any portion of a non-Roth account to a Roth IRA if the account has any after-tax contributions

Additionally, Democrats have proposed limits on rollovers. Starting in 2032, taxpayers earning more than $400,000 would be prohibited from converting funds from non-Roth accounts to Roth IRAs. 

The bill would also provide more authority to the Internal Revenue Service (IRS) to snoop on Americans’ IRAs. It would require any defined contribution account with more than $2.5 million to be reported to the IRS and would double the length of time allowed for the IRS to pursue IRA noncompliance, from 3 years to 6 years. 

Effectively, this bill puts additional limits on Americans can do with their retirement savings. This could make the usage of IRAs less attractive overall.

In 2020, over 37 percent of U.S households owned an IRA. According to the Investment Company Institute (ICI), 36.8 million owned a traditional IRA while 26.3 million owned a Roth IRA. Now more than ever, IRAs are a significant portion of households’ assets. ICI’s report states that “in June 2020, IRA assets were 11 percent of all household financial assets, up from 8 percent of assets two decades ago.”

According to the Bureau of Labor Statistics, 67 percent of private industry workers had access to employer-provided retirement plans in March 2020. Additionally, 91 percent of union workers had access to a retirement plan. 

In their effort to raise revenue for future spending, Democrats are opening the door to present and future abuse of retirement accounts. Additional restrictions on rollovers and contributions, and increased IRS reporting is a slippery slope to more government intervention into individual retirement savings, and potentially less savings overall.

Increasing taxes on Americans’ retirement savings via the additional restrictions in this package would be detrimental to households, especially in the wake of the COVID-19 pandemic. Lawmakers should be opposed to the changes to IRAs in this package and the other billions of dollars of tax increases that will decrease the standard of living for all Americans.