Attack on Roth IRAs Is an Attack on Careful Savers

Americans are retiring later than they ever have. According to the most recent data, more than 20% of Americans over 65 years old are working or actively looking for work. This is nearly double the rate in 1985. Further, that same data shows that Americans – on average – are retiring three years later than they were just a few decades ago. With ever-increasing economic uncertainty due to lockdowns and other restrictions, it’s likely this problem will get worse.

One option that Americans have had available for decades to help them retire on their own schedule is to invest in a Roth IRA. Named for former Sen. William Roth (D-Del.), these accounts provide retirement plans where the money going in is already taxed, and growth and most qualified withdrawals from the account are tax-free. They were designed to be a better form of retirement security for working families than traditional investments. It is critical for many future retirees to know they will have a tax-free option at the end of the road.

Unfortunately, Roth IRAs – and those who utilize them – now find themselves under attack by lawmakers in Washington. Sen. Ron Wyden (D-Ore.) is reintroducing legislation that would severely restrict these crucial retirement savings vehicles. The Wyden proposal would limit the amount of money that can be put into these IRAs and cap the amount of allowable growth in the accounts over time. It would also limit the ability for many to move money from sub-optimal retirement accounts into a Roth IRA.

Like most other liberal tax proposals coming out of the current Congress, this is being pitched in the name of targeting the super-wealthy. Wyden describes Roth IRAs as “yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes.”  He cites PayPal founder Peter Thiel’s Roth IRA to justify a measure that will punish a lot of families who are not rich, who spent a lifetime saving carefully, following the law and doing better than expected in their retirement investments.

In addition to hurting people, the measure will harm the economy. Investors get to put their money into the economy and help American companies and minimize the risk of doing so. This benefits them in the long run – as it did with Thiel – and will also benefit the future recipients of the money Thiel made off of those investments. Those tax-free dollars will benefit the innovators of tomorrow. Just because Uncle Sam did not get his cut of those transactions does not mean they weren’t good for Thiel or good for the economy as a whole.

Of course, Wyden’s plan will not be limited to billion-dollar IRAs because the goal is to raise a lot of tax revenue to pay for the $3.5 trillion budget deal. Estimates show, however, that these changes would bring in only $4 billion over the next decade – just 0.1% of $3.5 trillion. Wyden’s plan would set a cap at $5 million for Roth IRAs. Given that the value of these accounts depend on the growth of sometimes risky investments and accumulate over the life of someone’s career, many middle-class holders of these Roth IRAs are going to hit this arbitrary benchmark before retirement age.

The result will be a significant deterrent to prudent financial planning. Under such a scheme, there is very little upside to making risky investments for long-term goals. Roth IRAs would become high risk with governmentally limited rewards. With this lack of investment, the entire economy will eventually suffer that blowback. Innovation will be stalled and middle-class Americans will be retiring later. Meanwhile, the only people who will still be able to afford certain risks will – ironically – be the billionaires like Peter Thiel. Such is the case with most liberal proposals.

As Congress considers the massive $3.5 trillion budget, it should avoid the temptation to use provisions like these to raise revenue at the expense of savers’ retirement. President Biden promised he would not raise taxes on anyone making less than $400,000 per year. This plan to slash retirement savings is effectively a tax on a broad swath of Americans, many of whom make well less than $400,000 per year.

During a time of unprecedented economic insecurity, lawmakers on both sides of the aisle should be encouraging investment and retirement saving, instead of punishing it.

Daniel Savickas is the government affairs manager of Taxpayers Protection Alliance.