Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

How the Roth IRA changed retirement plans

- by Alan Duvall 

Published in Dayton Daily News June 11, 2006 

What goes in must come out - a trustworthy maxim of tax law particularly relevant to retirement plans, employee benefits and life insurance. 

If it’s deductible going in – it’s taxable coming out.  If it’s not deductible going in – it’s not taxed coming out.

 Once upon a time, we were blessed with the simplicity of traditional pensions and IRA’s.  Contributions were deductible going in – investment income accumulated tax free – and all distributions from the plan were taxed. 

Then along traipsed a Congressman who proudly invented a new form of IRA affixing his name thereto - bestowing upon us Roth IRA’s.  Contributions going into Roth IRA’s were not deductible but all later distributions, including plan earnings, emerged tax-free.     

The main attraction of Roth IRA’s was the permanent tax-free accumulation of plan earnings and taxpayers were granted the opportunity to convert existing IRA’s to Roth’s.  Roth conversions generated taxable events whereby taxpayers had to return prior year IRA contribution savings to the government. 

Taxpayers with adjusted gross incomes exceeding $100,000 historically have been unable to convert traditional IRA’s to Roth’s. 

Congress has just anointed high-end taxpayers access to Roth conversion opportunities, effective 2010.  Marketing geniuses have labeled this revision a “revenue raiser” since conversions deliver short-term bursts of tax receipts (payable over two years) to government coffers.  Predictably, Congress became so enamored of the Roth concept a new law was enacted enabling companies the election to extend Roth options to traditional 401(k) plans, effective January 1, 2006.    

If a Roth option exists, rich and poor employees alike may pre-designate contributions for Roth-treatment to be held in accounts separate from traditional 401(k) funds.  Contribution limits for all 401(k) contributions remain static. 

Roth 401(k) distributions retain tax-free status if made five or more years subsequent to original plan contributions and after the age of 59 ˝, disability or death.  

GM purportedly became the first major employer to offer Roth 401(k) benefits to employees.  Other major firms may feel compelled to mimic GM to remain competitive. 

And smaller companies?  Well, administrative hurdles are complex and expensive.  Traditional 401(k) plans can extract large administrative compliance costs even without added complexities of segregating additional Roth funds.  

Congress is manifest in its belief more is always better.  Personally, I wistfully reflect on historically simpler times.

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.