Flat Tax on Retirement Distributions
Any number of proposals that would change the tax treatment of traditional retirement accounts have been floated in recent years. One such proposal involves placing a flat tax on amounts that are withdrawn from retirement accounts that have been originally funded with pre-tax dollars. Some proposals would offer a lower-tax withdrawal window for taxpayers who are at least 60 years old (regardless of income levels).
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about imposing a reduced, flat tax on retirement account withdrawals.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Providing for a flat tax on retirement account distributions would have an extremely positive impact on the economy as a whole. Today, we have something like $45 trillion tied up in tax-deferred retirement accounts. Those funds have not been subject to any income tax whatsoever. The vast majority of American account owners in higher tax brackets will avoid taking the money out until they absolutely must, at their required minimum distribution age. They simply don't have the incentive to take that money and put it back into the economy. A flat tax window would provide that incentive.
Bloink: We shouldn't be looking for ways to incentivize taxpayers to withdraw funds from their tax-deferred retirement accounts before they've actually retired. These amounts have been carefully invested over time. We impose penalties to incentivize individuals to keep their funds within that retirement account "wrapper". It makes very little sense to create a regime where we're encouraging taxpayers to take out their retirement dollars and spend them before reaching retirement.
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Byrnes: Allowing for a flat tax--whether it be 10% or 15%--would incentivize the wealthiest taxpayers with the highest account balances to take the money out and use it, rather than wait and take out the bare minimum once the government finally forces them to do so via the RMD process. It's those taxpayers who have the highest retirement account balances—and also who are likely to be in the highest income tax brackets, meaning the flat tax would provide a significant incentive.
Bloink: Tax deferral is the incentive we offer to individual savers to give them a reason to keep the funds in the account. The longer these retirement funds remain invested, the higher the account balances become with time. This is the goal that we should be working toward--encouraging taxpayers to save and keep those funds invested until they need them to provide income for living expenses during retirement.
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Byrnes: We could offer a temporary window where the flat tax would be available, not a permanent change. The withdrawal incentive created by this flat tax would also give the federal government a revenue influx that they badly need to pay down the national debt and get this country back on track.
Bloink: A flat tax on retirement distributions is essentially a hidden tax cut for the very wealthiest taxpayers who would be taxed at the highest income tax rates. Lower-income taxpayers would receive little or no benefit from this flat tax (even if it's technically available to them) because the flat tax would not be lower than the otherwise-applicable income tax rate they would pay if they took the funds out. The last thing we need is another tax break for the wealthy, especially in the wake of the OBBB.