How Shifting from Traditional IRAs to Roth IRAs Affects Personal and Government Finances

In this report, we examine the different ways that Roth individual retirement accounts (IRAs) and traditional IRAs affect their investors and the government. People who want to shelter more income per dollar deposited in the account, provide larger bequests, or eliminate uncertainty about how withdrawals will be taxed will find Roth accounts more attractive (other factors held equal). From the government’s perspective, however, Roth IRAs create several problems. Given policymakers’ focus on the 10-year budget window, myopic representatives may use the short-term revenues from Roth accounts to pay for new spending or lower taxes, thus exacerbating long-term budget pressures. Because of their higher effective contribution limits, Roth IRAs reduce the present value of future revenues. Additionally, when people use Roth IRAs, the government misses a vital opportunity to be a silent partner on investment returns and thus diversify its financial risks.