At press time the Senate was poised to vote on–and approve–tax cut legislation that the House passed on May 10 by a 244-185 vote.
The legislation includes incentives for wealthy taxpayers to convert to Roth IRAs by removing the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA. Some analysts are concerned that the provision would have an impact on the sale of annuities, although industry officials discount such an impact.
The $70 billion tax cut legislation left up in the air whether legislators will ultimately enact a provision proposed by Senate tax writers last year that would impose punitive taxes on investor-owned life insurance transactions, including those involving charities.
The life industry’s concern is that so-called “trailer tax cut legislation” the Republican congressional leadership is committed to passing may include the IOLI provision as a revenue raiser.
Republican leaders in Congress have made a commitment to Sen. Charles Grassley, R-Iowa, that the second tax cut bill will be attached to must-pass pension reform legislation now being drafted by a House-Senate legislative reconciliation panel.
And it was Grassley who added to the Senate bill last November the provision imposing punitive taxes on IOLI.
In the Roth IRA provision, tax writers removed the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA.
Under the provision, taxpayers can elect to pay tax on amounts converted in 2010 in equal installments in 2011 and 2012.
While Democrats oppose the bill, through arcane rules regarding budget legislation, it needed only a simple majority in the Senate to win passage and thus could not be stopped by a filibuster.
Such an expansion of Roth IRAs would reduce annuity sales to wealthier individuals who are currently not eligible for Roth IRAs, according to tax experts at Washington Analysis, a securities research firm that caters to buy-side clients such as pension and hedge funds.
Withdrawals from Roth IRAs after age 59 1/2 are not taxable, while withdrawals from annuities are taxed at the regular income tax rate.
According to Washington Analysis and American Council of Life Insurers’ tax experts, under current law, single taxpayers with annual incomes in excess of $110,000 and married filers with incomes of more than $160,000 are ineligible for the Roth IRA.
Removing these limits would prompt additional transfers of money into tax-advantaged Roth IRAs at the expense of traditional IRAs and, at the same time, generate billions in tax revenue as assets in the traditional IRAs are taxed for the first time.
Such a shift of money into Roth IRAs would be a positive for mutual fund companies but a negative for annuity writers, analysts said.
Whit Cornman, a spokesman for the ACLI, said, “Given the fact that the provision only applies to rollovers from traditional IRAs to Roth IRAs, we do not see any significant effect on annuities.”
The primary purpose of the bill is to extend tax cuts enacted in 2001 and scheduled to expire in 2008 an additional two years.
But Mike Kerley, senior vice president, federal government relations at the National Association of Insurance and Financial Advisors, did voice concern.
He said the Roth IRA provision is consistent with the Bush administration policy “that all savings should be tax-deferred and which does not distinguish between long-term savings as provided by life insurance and annuities, and short-term savings as provided by such vehicles as a lifetime savings account.”
To the administration and its supporters in Congress, “all saving is good and should be tax-preferred,” Kerley said.
“We, of course, disagree,” he said. “We believe that tax preferences should be used to encourage people to save for their long-term family and retirement security. But we have not taken a public position on the tax reconciliation.”
Kerley said the Roth IRA provision represents a “fire-sale type of mentality where people would be encouraged to roll over their traditional IRAs into Roth IRAs. The resulting tax that would be paid on the rollover of the traditional IRA is simply being used as a gimmick to pay for other provisions in the tax reconciliation bill.”