GETTING PERSONAL:The Uncertain Future Of Traditional IRAs
31 Jan 07:30
By Kaja Whitehouse
A Dow Jones Newswires Column
(This report was first published late Thursday.)
NEW YORK (Dow Jones)--The Bush administration is welcome to expand the tax
benefits of America's retirement accounts so long as it doesn't attempt to
balance that out with restrictions elsewhere.
That's the sentiment coming from tax and retirement experts following
published reports that the administration is exploring plans to gussy up
features of some retirement accounts while consolidating and phasing out
others.
Details have been sketchy, but early news reports suggest that among the main
points of the proposal are plans to increase the attractiveness of the Roth
individual retirement account, or IRA, while lessening the allure of the
traditional IRA.
It's not certain what limitations would be added to the traditional IRA, if
any, but experts fear that restrictions on traditional IRAs could hurt
investors. People with large assets in traditional IRAs may not want to take
the tax bite to convert to a Roth. Plus, it could create problems for people
looking for a place to roll over assets tax-free from a 401(k) or other
qualified retirement plan when they retire or change jobs.
Additionally, some experts question whether an improved IRA will be necessary
after 2005, when a new vehicle known as the Roth 401(k) enters the market. The
Roth 401(k) is essentially a 401(k) with the tax benefits of a Roth.
The main difference between a traditional IRA and the Roth IRA is when
investors get a tax break. People who invest in a traditional IRA get a tax
deduction on contributions, but they're taxed when the money is withdrawn.
People who invest in a Roth are taxed on contributions, but they can withdraw
the money tax-free after five years.
According to reports, Roth IRAs would become more attractive and accessible
to more people under the Bush proposal. Annual contribution limits for the Roth
IRA would rise to $7,500 from its current limit of $3,000. Plus, more people
would qualify to invest in the Roth because earnings limits that currently
restrict who can contribute would be significantly lifted.
But talk of phasing out the traditional IRA has people worried. "I assume
people will have to have a choice. I can't imagine forcing people to roll over
into a Roth," said Martin Nissenbaum, national director of retirement planning
and taxation at Ernst & Young in New York.
"Expanding the Roth IRA is a good idea. It's how to deal with existing IRAs
that is going to take a lot of thought," he added.
Let It Die Naturally
Restrictions to traditional IRAs also could hurt the rollover business, said
Nick Kaster, senior pension and IRA analyst at tax consultant firm CCH Inc. in
Riverwoods, Ill. The majority of IRA assets are in traditional IRAs because
they've been around longer, and also because people use them as a way to roll
over money from qualified plans, such as the 401(k), tax-free. Because money
contributed to 401(k) accounts has not been taxed, it can't be rolled over into
a Roth IRA, where contributions are taxed. "Even if they made all IRAs (into)
Roth IRAs, they would have to retain some sort of rollover IRA," he said.
Not everyone believes that phasing out the traditional IRA would translate to
placing new restrictions on them. The phasing-out process simply could entail
leaving them unchanged and allowing them to become less attractive than the new
super Roth. The Bush administration can't pare the features of the traditional
IRA without hurting too many investors, said Steve Lockwood, co-author of "The
Individual Retirement Account Answer Book" who thinks the administration simply
will let the traditional IRA die a natural death.
The Roth proposal would coincide with Bush's plan to make stock dividends
tax-free to investors, Lockwood said. If a dividend tax cut were approved,
investorswould be wise to avoid buying stocks in their traditional IRA
accounts where they would face income tax on what was suppose to be tax-free
earnings. But with a Roth, investors wouldn't be taxed on dividends, making it
more appealing, he said.
Of course, the Roth 401(k) may outshine the Roth IRA even after its
alterations. Introduced by the 2001 tax law, the Roth 401(k) will allow people,
after 2005, to save in their company's 401(k) plan with after-tax dollars for
the benefit of tax-free savings and withdrawals. The Roth 401(k) will abide by
the same contributor limits as the 401(k) - or $15,000 by 2006 - and people can
contribute regardless of their earnings.
"That might somehow meld into these proposals," but it's not yet clear how,
said Kaster. He added: "It's kind of hard to say much because details are so
sketchy."
-By Kaja Whitehouse, Dow Jones Newswires; 201-938-2243;
kaja.whitehouse@dowjones.com
(END) Dow Jones Newswires
01-31-03 0730ET |
