(PresidentialHill.com)- This week, the House passed a new bill that would provide big breaks for some of the country’s wealthiest people.
The bill, called the Secure 2.0 Act, would still have to pass through the Senate before it could head to President Joe Biden’s desk for signature. The upper chamber hasn’t scheduled the bill for a vote just yet.
Part of the legislation would delay the age at which the federal government would begin to tax retirement accounts. Right now, that age is 72, but the bill would change that to 75.
In essence, this would provide three additional years where wealthy taxpayers could defer tax payments as well as enjoy tax-free growth on their retirement investments.
The House included how they would make up for that major loss in revenue for the federal government, but financial pundits are saying it’s just a common accounting trick.
They are counting money the government collects through Roth account taxes earlier than normal, which would make up for this projected lost revenue on the traditional accounts over a budget window of 10 years.
This change, though, would definitely add to the country’s deficit unless a future Congress acts to offset it.
An analyst who works for the Tax Foundation, Garrett Watson, recently explained:
“It’s going to bring revenue is now because folks are paying tax immediately on contributions treated as Roth rather than being provided an immediate deduction on a traditional account, but on the other side, when you withdraw from a Roth that has earnings, those earnings aren’t being taxed.
“And so, further down the line, especially after the 10-year budget window, that’s going to have a negative impact on revenue.”
The benefit that Roth IRA accounts provide is that they are funded with post-tax money. When people withdrawal money from these accounts, they don’t have to pay taxes on it, meaning they enjoyed tax-free growth.
Traditional retirement plans work the opposite way. Money is contributed pre-tax, with the tax being paid when people withdrawal the money.
The new bill, therefore, leads to a boost in revenue for the government in the short term but a loss over the long term.
Assuming stable tax rates, then, the only difference between the two types of retirement plans is when the tax is paid — not how much total tax is paid. That’s why critics of this plan say using the reasoning the House has employed in their bill doesn’t justify an actual tax cut.
Daniel Hemel, a law professor at the Unviersity of Chicago, explained:
“One should immediately be skeptical of a provision where the giveaway has to be hidden, has to be papered over by this accounting trick.”
The reason why the change in age from 72 to 75 will end up benefitting wealthier people is that most Americans rely on their retirement savings well before they turn 75. Those who can wait until they’re 75 are often wealthier individuals, and they’re the ones who would benefit under this new House plan.
