Harmonizing Roth and Traditional IRA Rules

Under current law, owners of Roth IRAs are not required to take required minimum distributions (RMDs) during their lifetime (beneficiaries who inherit Roth accounts are, however, subject to RMD rules). Owners of traditional IRAs, on the other hand, are required to start taking RMDs once they reach age 72. Recent proposals have been floated to change those rules so that the same lifetime RMD rules would apply to both traditional accounts and Roth accounts.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about proposals to harmonize the RMD rules for both Roth and traditional retirement accounts.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: A Roth IRA or Roth 401(k) is granted certain tax benefits in order to incentivize saving for income during retirement. Under current law, many of these Roth accounts end up functioning more like tax-preferred estate planning vehicles. This just gives wealthy Americans yet another way to game the system and pass wealth to heirs without paying their fair share of taxes.

Byrnes: Roth accounts are fundamentally different from traditional retirement accounts. Account owners have already paid taxes on these funds. The entire point of the Roth account is to create a tax-free source of income to draw from during retirement. If Roths and traditional accounts are subject to the same RMD rules, where's the incentive for taxpayers to diversify and fund these accounts over pre-tax retirement accounts that provide a current income-reduction benefit?

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Bloink: Applying the same RMD rules to Roth accounts as apply to traditional retirement accounts would go a long way toward ensuring that Roth accounts function as intended: vehicles to accumulate wealth during working years that will be distributed during retirement. As it stands under current law, the wealthiest Americans can use these Roth vehicles to accumulate wealth and pass it to future generations on a tax-preferred basis.

Byrnes: Our lawmakers should be focused on doing everything possible to encourage the average American to save for retirement. Responsible retirement savings will go a long way toward reducing poverty among the elderly and ensuring that Americans aren’t forced to rely solely on government programs like Social Security and Medicaid for their post-retirement needs.

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Bloink: The bottom line is that Roth accounts aren’t estate planning vehicles. If we change the rules of the game when it comes to RMDs, we’ll ensure that taxpayers are using these accounts for retirement income purposes. No one is suggesting that Roth distributions should be taxed a second time during retirement—meaning that Americans would continue to have the same savings incentives to diversify during retirement. Requiring RMDs would go a long way toward maintaining the Roth account as a retirement planning vehicle and reduce much of the controversy surrounding these accounts in general.

Byrnes: The tax benefits of a Roth are substantial—and a significant part of that benefit is the ability to accumulate earnings on savings in a tax-free manner. Americans should have the ability to decide when to liquidate their Roth accounts to maximize their value. That’s a substantial part of the appeal, and if we apply the same RMD rules to Roths, we’ll greatly reduce that appeal. The end result? More Americans will ignore the Roth option and may save even less for retirement.