Worst Provision of Tax Plan- Passing on Tax Free Income to Heirs

[Nathan Newman]

Roth IRAs are relatively limited, but Roth 401Ks look to be $15,000 per year
compounded for the lifetime of an upper-income worker.  Dropping a rate from
39.5 to 35 is bad or taking capital gains taxes down to 20 or 18 is bad, but
dropping taxation to zero on the compound investment income from the Roth
401Ks looks to be worse- especially if the provision I noted holds up and
they can be left tax-free to heirs - a provision that could make repeal of
the inheritance tax pretty irrelevant, since folks might be able to leave
millions of dollars stored in Roth 401Ks untaxed and untaxable to designees.
As I said, I can't tell if I interpreted the provision correctly, but it
still looks like the mother of loopholes in the law.  And less likely to be
repealed than most of the others just because it's effects are more
long-term.

-- Nathan

----- Original Message -----
From: "Max Sawicky" <sawicky at bellatlantic.net>

This looks to be the worst provision of the tax plan, allowing people to
create Roth 401Ks and apparently pass on funds to heirs who will themselves
be able to withdraw money tax free.  This will create as far as I can tell
massive pots of wealth untaxed generation to generation.  I can't tell if
it's as bad as this article indicates.

So is it Max?  - Nathan Newman

The deposits to the Roth IRA's are with after-tax
dollars, so they are not necessarily any worse than
the other type of IRA where deposits are tax free
and withdrawals are fully taxed.  There are income
limits to both, so we are not really talking about
the dynastic fortunes.  In the latter connection,
the worst parts of the tax code are the preferential
treatment of capital gains, and the potential repeal
of the Estate Tax.

We tend to gloss over the fact that very few people,
as a share of the population, were subject to the top
rates of 39.6 and 36 percent.  Maybe one or two percent.
So the reductions in these rates were also egregious
from a distributional standpoint.  These and the above
are huge revenue losses, compared to the Roth IRA's.
You can see for yourself if you go to the web site
of the Joint Committee on Taxation, which has an
itemized run-down of the cost and distribution
of the tax bill.

As far as IRA's go, there are progressive ways to
incorporate them into a tax system that I have
tried to write about.  So I can't really pose as
an inveterate foe of savings preferences.

mbs