Ending the Roth Rollover: Why Stop There?

Howard Gleckman made a strong case yesterday for repealing the provision that allows unlimited conversions of traditional (deductible) IRAs into Roth accounts beginning next year.  Today, Len Burman adds the totally sensible suggestion that Congressional scorekeepers display the present value costs of such provisions, so we’ll know that they cost the government money in the long run despite the short-run revenue pickup in the budget window.

But why stop with ending the Roth rollover?  Why not allow—or better still, require—taxpayers to convert their Roth IRAs and 401k plans to deductible IRAs and 401ks.  Taxpayers with Roth accounts could deduct the entire value of the account from taxable income in the current year, thus reducing the tax basis (the amount deemed paid for the assets) to zero.  Future withdrawals from the accounts would be fully taxable.

Reverse rollovers would cost a bundle in the next two years, as taxpayers claim deductions for the conversions.  But that’s good in a recession. Recovery may have begun, but unemployment is still abnormally high and any additional spending out of these tax refunds would add to the stimulus programs that are only now kicking in fully. 

In present value terms, eliminating Roth IRAs would raise federal revenues, especially if marginal tax rates rise.  And with Roth assets converted to traditional deductible assets, we’d be spared the prospect of having wealthy seniors getting a lot of their retirement income tax-free.   That future would surely create resentment among younger workers who will have to pay higher taxes to support the growing numbers of seniors.

So, the bottom line: cut taxes now and get smaller deficits later!