Roth Individual Retirement Account Research Articles

Retiring the 401(k): A New Framework for Retirement Savings

Americans attempting to save for retirement face a maze of account options, each with their own unique tax consequences. Unfortunately, this maze also limits access to tax-advantaged retirement savings and takes money out of savers’ pockets. In this article, we recommend entirely eliminating traditional and Roth 401(k) accounts after a date to be specified by Congress. To compensate for dollars that workers (and their employers, through matching contributions) formerly contributed to these accounts, we propose raising the current contribution limits to traditional and Roth Individual Retirement Accounts (“IRAs”) proportionately. We argue that this reform would solve numerous inefficiencies and inequities in the current 401(k) system — it would effectively expand lower- and middle-class workers’ access to tax-advantaged retirement savings. In Part II we discuss how our proposal would solve seven severe problems plaguing the 401(k); in Part III we explain the options for transitioning from the current regime to an all-IRA regime; in Part IV we address some preliminary objections to our proposal.

What if OregonSaves Went National: A Look at the Impact on Retirement Income Adequacy

The OregonSaves program began in July 2017 to provide defined contribution (DC) plan coverage for those workers in the state of Oregon who are not currently eligible for an employer-sponsored DC plan. The program requires employers to automatically enroll workers into a post-tax individual retirement account (IRA). The program’s default contribution rate is 5 percent; contributions automatically increase by 1 percent each year until they reach 10 percent (unless the employee opts out of automatic increases). Employees can opt out of the program or choose a savings rate of as little as 1 percent and as much as 100 percent of gross pay, up to annual Roth IRA contribution limits. With more than a year of experience with the OregonSaves plan, the Employee Benefit Research Institute (EBRI) asked the question: What if OregonSaves were a national program? How would that impact the retirement security of American workers? We further asked how a national version of OregonSaves would compare with nationwide implementation of 401(k) safe harbor plans among employers who do not currently offer a defined benefit (DB) or DC plan. We examined both using EBRI’s Retirement Security Projection Model® (RSPM). The incremental benefit of including a full auto portability system in addition to these changes was also simulated. We found that the “national” OregonSaves plan would provide a 16.3 percent reduction in retirement deficits (as measured by the average retirement savings shortfalls (RSS)) for the youngest age cohort simulated (those currently ages 35–39). The reduction would be smaller for those closer to age 65, with the reduction being only 3.1 percent for those currently ages 60–64. Overall, this would reduce the simulated retirement deficits by $456 billion, or 12 percent of the $3.83 trillion under the baseline assumptions. In contrast, the 401(k) safe harbor plan expansion would reduce the retirement deficits for the youngest cohort by an additional 8.8 percentage points (for an overall reduction of 25.2 percent). The additional reduction for those ages 40–44 would be slightly higher (9.2 percentage points), but by ages 60–64 the additional reduction would only be 2.5 percentage points. Overall, this scenario would reduce the simulated retirement deficits by $645 billion, or 17 percent of the $3.83 trillion under the baseline assumptions. Finally, we added a full auto portability scenario to both of the access expansion scenarios. Under the “national” OregonSaves plan with a full auto portability scenario, simulated retirement deficits would be reduced by $759 billion, or 20 percent of the $3.83 trillion under the baseline assumptions. Under the 401(k) safe harbor plan expansion with a full auto portability scenario, simulated retirement deficits would be reduced by $1,031 billion, or 27 percent of the $3.83 trillion under the baseline assumptions.

Civilizing the Roth IRA Monster

The accompanying Article is not a financial planning guide on whether to contribute or convert funds into a Roth Individual Retirement Account (Roth IRA). Legions of advice already exists to help analyze that choice. Instead, the Article addresses the Roth IRA from a public policy perspective.The Roth IRA is a seemingly innocuous after-tax personal retirement savings arrangement. The law, however, has received fierce policy criticism since its enactment less than two decades ago. For example, the title of this Article stems from one such criticism. A 2011 Op-Ed admonished that the Roth IRA is a dangerous “fiscal Frankenstein” destined to “wreak havoc” on the U.S. Treasury. Notwithstanding, Presidents Clinton, Bush, and Obama have all signed off on legislation enacting or expanding the Roth IRA. Further, the public has already poured $660 billion into Roth IRAs and the inflows are growing fast.Consequently, this Article takes a fresh look at the Roth IRA. The Article does find serious flaws in the existing law. In particular, a 2014 GAO report estimated 300 people had IRAs worth at least $25 million. Similarly, a 2012 Forbes article noted that Max Levchin, a 36 years old high-tech entrepreneur, had built a Roth IRA worth at least $95 million. Skewed wealth accumulations, along with the statutory feature that allows beneficiaries to stretch distributions over their lifetimes, present serious income inequality issues. The Article therefore concludes by offering recommendations to turn the rampaging beast into a benevolent benefactor.

How To Invest Your IRAs In Profitable Real Estate IRAs

Since the inception of Individual Retirement Accounts (IRAs) in 1974, the public has been advised strongly by bankers, accountants (CPAs), and investment advisors that the best strategy for IRA holdings is investment in stocks or bonds. Unfortunately, with the sharp decline in the market value of stocks and the bottoming out of interest rates in the past years, most IRA funds have performed very poorly and investors have witnessed how drastically their retirement savings lost their accumulated value. During these years, apparently, not many investment advisers have bothered to consider other alternative ways for investing accumulated IRAs and pension funds. There is, in fact, another viable investment alternative that offers both safety and a considerable growth rate. That is real estate IRAs. The purpose of this paper is to explain (a) why the traditional and Roth IRA should be invested in real estate, b) the steps involved in establishing a sound real estate IRA, (c) the restrictions and the dos and don’ts of investing in a real estate IRA, and (d) the tax and penalty consequences of incorrect investment in a real estate IRA.

Determinants of the Choice between Roth and Deductible IRAs

This study examines tax and nontax determinants of the choice between Roth and deductible Individual Retirement Accounts (IRAs). I find evidence that higher current tax rates relative to average tax rates are positively, but modestly, related to the probability that a taxpayer will contribute to a deductible IRA rather than a Roth IRA. I also find that taxpayers with greater liquidity are more likely to choose a Roth IRA, which is the option with a higher effective contribution limit. The results relate to the question of whether taxpayers behave in a tax‐efficient manner and the behavioral response to statutory tax rate changes.

Determinants of the Choice between Roth and Deductible IRAs

This study examines tax and non-tax determinants of the choice between Roth and deductible Individual Retirement Accounts (IRAs). I find evidence that higher current tax rates relative to average tax rates are positively, but modestly, related to the probability that a taxpayer will contribute to a deductible IRA rather than a Roth IRA. I also find that taxpayers with greater liquidity are more likely to choose a Roth IRA, which is the option with a higher effective contribution limit. The results relate to the question of whether taxpayers behave in a tax-efficient manner and the behavioral response to statutory tax rate changes.

Behavioral Economics and Fundamental Tax Reform

The most common use of the insights of behavioral economics in the cause of fundamental tax reform has been to argue for the employment of ad hoc tax-favored savings vehicles - such as individual retirement accounts (IRAs), medical, and educational savings accounts, and so on - within an income-tax framework. There is no reason under a rational life-cycle model of individual savings behavior why these ad hoc vehicles should work, to increase savings on the micro (individual) or macro (collective social) levels, whether they follow the postpaid approach of traditional IRAs or the prepaid approach of Roth IRAs. Prepaid accounts generate a windfall gain to existing savers, and offer no cash-flow relief for current non-savers to help them save. Postpaid accounts can be easily arbitraged by borrowing, or dissaving. Proponents of these plans thus point to lessons from behavioral economics, arguing that myopic individuals who use mental accounts might be led to save by the special vehicles. This essay takes exception to this standard view. It argues that this view of matters misconceives basic principles of behavioral economics, using ad hoc findings in an ad hoc fashion to justify ad hoc, incremental reform. Best understood, behavioral economics suggests that ad hoc tax favored plans will not work. This counter-theory is supported by the data, which show, broadly, decades of ad hoc tax-favored vehicles within the Internal Revenue Code, with more apparently on the way, matched by convincing evidence of little or no savings by most Americans, and little savings in the aggregate. The essay concludes by suggesting that a happier, more stable marriage of behavioral economics and fundamental tax reform suggests fundamental, not incremental, reform of the tax system.

Use of Roth IRAs by young college graduates for retirement planning purposes

The Roth Individual Retirement Account (IRA) is gathering acceptance among younger workers and financial advisers. With the right tools and ideas financial advisers can expand their client base by including, perhaps, the children of existing clients.

The Effect of the Current Ira Program on Federal Debt

This article analyzes the long-term impact of the current individual retirement account (IRA) program on government debt. The initial work on this subject was conducted by Feldstein (1995), who argued that the traditional IRA has a favorable long-term effect on government debt. Yet, absent from the literature is any formal extension of Feldstein’s model to include the Roth IRA. Using modeling techniques similar to Feldstein, the Roth IRA is shown to have a negative long-term effect on government debt. The model includes personal and corporate tax revenue collections, the cost of government debt, the source of Roth IRA saving, the payment source of the taxes paid on Roth contributions, and optimal investment strategies. Aconceptual, newtype of IRA is proposed as a replacement for the Roth IRA.

A Primer on IRAs

Individual Retirement Accounts (IRAs) now hold more assets than either defined benefit or defined contribution pension plans, but many people do not understand how they work. This Just the Facts reminds readers of the differences between Roth and conventional IRAs and describes their role to date as saving vehicles. This piece concludes that although households hold a lot of money in IRAs, these accounts do not appear to have been major vehicles for new saving. Despite the valuable tax benefits associated with both the conventional and Roth IRAs, people tend to use these accounts mainly as depositories for rollovers from their employer-sponsored plans rather than for new saving.

Analysis of investment choices for retirement: a new approach and perspective

This paper evaluates deductible individual retirement accounts (IRAs), Roth IRAs, non-deductible IRAs, and open taxable investments using equal initial after-tax investments for the different choices. The concept of a break-even tax rate at the time of withdrawal of funds is used to analyze optimal choice between the deductible IRA and the Roth IRA. The break-even tax rate is seen to be a decreasing function of rate of return on the investment and the investment horizon. Regarding non-deductible IRAs, and open taxable investments, the findings indicate that the non-deductible IRA is the optimal choice for individuals with long investment horizons.