An embryonic proposal to raise revenue by expanding eligibility for the Roth individual retirement account program could hurt annuity sellers.
Some in Congress appear to be looking into the possibility of adding the proposal to the tax-cut reconciliation bill, in an effort to reduce tax revenue losses enough to protect the bill from running into trouble in the Senate.
No one knows whether the proposal will ever become an official part of the reconciliation bill or how it actually would affect annuity sales if enacted.
Right now, talk about the potential effect of Roth IRA expansion on annuity sales is “pure speculation,” according to officials at the American Council of Life Insurers, Washington.
But Tim VandenBerg of Washington Analysis, Washington, a securities firm that serves institutional investors, says Congress may start a gradual expansion of the Roth IRA program to offset the price of other legislative initiatives.
Negotiations between the House and Senate to reconcile the tax bills were close to completion before the Easter recess, which ends Apr. 24 . The current legislative strategy is to split the bill into two separate pieces. One bill, which would enjoy important protections from challenges in the reconciliation process. This privileged bill would include the provisions expanding eligibility to contribute to Roth IRAs.
Annuity experts say the proposed Roth IRA eligibility expansion could shift some of the cash that has been flowing into deferred annuities and annuity-based 401(k) plans into mutual funds and brokerage accounts.
When high-income individuals contribute to annuities, they get no immediate tax breaks, and withdrawals are taxed at the regular income rate.
Individuals get no tax credits or tax deductions when they make Roth IRA contributions, but they do not have to pay taxes on withdrawals made after age 59.5 or on other withdrawals that qualify for special tax treatment.
Current federal law prevents single taxpayers with annual incomes over $110,000 and married filers with annual incomes over $160,000 from contributing to Roth IRAs.
If the government increased Roth IRA income eligibility limits, it would give up future revenue from taxation of annuity withdrawals in exchange for an immediate increase in taxes paid by high-income individuals who invest in Roth IRAs rather than annuities, experts say.