A proposal for a flat tax on retirement account withdrawals

[jollystomper]

Submitted, for your discussion, in the retirement zone (dee DEE dee dee dee dee DEE dee..)

I came across a YouTube personal finance video where David Bach (whom I had not heard of before, nor have I read any of his books) was being interviewed. He mentioned a proposal he is working on, and has launched a website with more details at: https://iraflattax.com

His proposal: for a defined number of years, apply a relatively low flat tax on tax-deferred retirement account withdrawals.

The details: a 12% flat tax on withdrawals from pre-tax IRAs or 401Ks, for eight years, for those age 60 or over.

What his view is of the current problem:

... about $44 trillion is now invested in retirement accounts (roughly one-third of U.S. household financial assets). The baby boomer generation alone – around 73 million people – collectively holds trillions of dollars (over $10 trillion) in these accounts. The unfortunate irony is that much of this money isn’t being used to enjoy retirement. Most boomers won’t touch their retirement funds until they’re forced to start Required Minimum Distributions (RMDs) in their 70s. In fact, over 80% of retirees only withdraw the IRS-mandated minimum or nothing at all until RMDs kick in. Financial plans often advise using taxable assets first and leaving IRA/401(k) money for last – to defer the hefty ordinary income tax on withdrawals as long as possible.

The result? These retirement accounts keep growing untouched, and retirees hesitate to spend the money they diligently saved.

His solution:

My idea is simple: Let’s reward the savers (especially Baby Boomers) by letting them actually use their retirement money. How? Reduce the federal tax on traditional retirement account withdrawals to a flat 12% (ordinary income tax rate) starting at age 60. This would be a temporary incentive – an eight- year window from 2026 through 2033 – during which retirees could withdraw from their pre-tax IRAs or 401(k)s and pay just 12% tax instead of whatever higher rate their ordinary income would normally incur.

This 12% IRA Flat Tax would dramatically lower the tax penalty for tapping into retirement funds.

The benefits he discusses are:
- Retirees better able to enjoy their money in peak years
- Economic stimulus from increase spending
- Delay Social Security stress (more might delay taking SS, potentially delaying the SS Trust Fund payout reduction forecast by a year or 2)
- Entrepreneurial activities (money moving into the economy might spark a new wave of business and services)
- Incentive for younger savers

The main tradeoff he sees is potential to increase the deficit due to a temporary drop off in tax revenues. But he feels that would be offset by more economic growth (some might see this as the "trickle down" theory).

He used AI to model 10%, 12%, and 15% and various time period scenarios to come up with his recommendation. The website, in addition to detailed paper and podcast, has a link to the NotebookLM model containg the research used to develop the proposal.

Your thoughts? I do not have a current feeling one way or the other. It is easy for me to run after something like this that would clearly be to my benefit. But I always try to take a wider view of things. Certainly, from a numbers perspective, there are many who would not benefit, and it might be seen as "helping those who do not need help". While I would be one to likely increase withdrawing from my tIRA or 401k before RMD time if they were taxed at a lower rate, I likely would not put all of what I withdrew back into the economy via increased spending - I might see it as a way to shift more moneis into my taxable accounts, which would only help me an our heirs. For now, this is just a proposal that I find "interesting", and am curious what others might think of it.

 

[SecondCor521]

It'll never get implemented. People facing 22% and higher rates, which are probably very well represented in the population he's talking about, would Roth convert or withdraw to taxable in massive amounts. This would simultaneously accelerate and diminish tax revenue, so I doubt Congress would like it. And people in general are not going to like giving tax breaks to the well off.

I had read that 80% of retirees take more than the RMD, which is mostly opposite of what he says in your first quoted block of text. That could be a mistake on his part, or on the part of the journalist.

From a policy perspective, a temporary tax break favoring a certain age group seems unfair to me. The people born in 1974 or later would have a legitimate gripe IMHO.

I don't think it would reduce stress on SS; in fact the opposite would occur. People claiming SS later, especially educated wealthy Baby Boomers, would probably collect more over time from SS than if they claimed earlier. Also, some income tax revenues related to SS taxation are fed back into SS, and reducing taxation on IRA and 401(k) distributions to 12% would reduce the size of this feedback loop.

Parenthetically, money that is in savings or investments is not useless. It provides assets which are used to provide loans or capital to banks and businesses. The more money in those categories, in theory at least, the lower interest rates can be, which can lower interest costs on loans for both consumers and businesses.

 

[street]

I'm hoping it catches some wind!!

 

[Kings over Queens]

From the simple perspective of keeping as much of my money and the treasury getting less, I'm all for it.

It's a very narrow, simplistic and selfish perspective.

 

[ut2sua]

This is too good for current retirees with large pre-taxed accounts.
It may be more interesting/fair to throw in the below condition:
If one chooses to get this flat-tax treatment, one needs to agree to a 25% (or whatever %) cut in SS benefit. This will directly help SS fund if the % cut is sensible enough that many will take.
Now the brain has to do more math work

 

[jollystomper]

I had read that 80% of retirees take more than the RMD, which is mostly opposite of what he says in your first quoted block of text. That could be a mistake on his part, or on the part of the journalist.

On this particular point, his source (a source that is also referenced by many others) is a study by JPMorgan Chase and the Employee Benefit Research Institute that found about 84 % of retirees at RMD age limited their withdrawals to the required minimum amount rather than taking more. I myself have not looked at that study; this article provides a little more detail: Research indicates that 84% of retirees commit this RMD error - Dallas Identity

By leveraging internal data and an Employee Benefit Research Institute database, JPMorgan Chase conducted a study spanning from 2013 to 2018 that examined the retirement transitions of 31,000 individuals. A significant majority (84 percent) of retirees who had attained the RMD age withdrew only the bare minimum. The study found that 80% of retirees who had not yet attained RMD status had not yet withdrawn funds from their accounts, indicating a preference for capital preservation during later years of retirement.

 

[GrayHare]

IMO odds of that happening will increase if Uncle Sam needs money to pay for another war.

 

[sdawson]

Seems like a bad idea to me (and I am one who would personally benefit).

All the folks who have done Roth conversions in the 22 and 24% tax bracket leading up to this are penalized big time.

The hit to the US budget will be too great. The government is happy to wait til RMD's kick in collect a higher tax. Will benefit a certain group of people while making the US finances worse and sticking it to both those who converted before this '8 year window' and after the 8 year window. Imagine someone who is 59 the year this ends!

Based on fairness, this is a bad idea.

 

[SecondCor521]

On this particular point, his source (a source that is also referenced by many others) is a study by JPMorgan Chase and the Employee Benefit Research Institute that found about 84 % of retirees at RMD age limited their withdrawals to the required minimum amount rather than taking more. I myself have not looked at that study; this article provides a little more detail: Research indicates that 84% of retirees commit this RMD error - Dallas Identity

...or I suppose I could be wrong or have misremembered! ;-)

 

[Koolau]

Seems like a bad idea to me (and I am one who would personally benefit).

All the folks who have done Roth conversions in the 22 and 24% tax bracket leading up to this are penalized big time.

The hit to the US budget will be too great. The government is happy to wait til RMD's kick in collect a higher tax. Will benefit a certain group of people while making the US finances worse and sticking it to both those who converted before this '8 year window' and after the 8 year window. Imagine someone who is 59 the year this ends!

Based on fairness, this is a bad idea.

Seems like a bad idea to me (and I am one who would personally benefit).

All the folks who have done Roth conversions in the 22 and 24% tax bracket leading up to this are penalized big time.

The hit to the US budget will be too great. The government is happy to wait til RMD's kick in collect a higher tax. Will benefit a certain group of people while making the US finances worse and sticking it to both those who converted before this '8 year window' and after the 8 year window. Imagine someone who is 59 the year this ends!

Based on fairness, this is a bad idea.

Please define "fairness." (I reject "equal" as a definition of fairness, so with that in mind...). Oh, and I can't define "equal" either.

As far as the proposal goes, clearly it would be good for me. I'd use the heck out of it. I already take double my RMD and pay 22 to 24%!

The "concept" is to get some of the saved cash into the economy. At least right now, I don't see that as being necessary. The economy seems to be doing just fine on its own but YMMV.

 

[marko]

Please define "fairness." (I reject "equal" as a definition of fairness, so with that in mind...). Oh, and I can't define "equal" either.

As far as the proposal goes, clearly it would be good for me. I'd use the heck out of it. I already take double my RMD and pay 22 to 24%!

The "concept" is to get some of the saved cash into the economy. At least right now, I don't see that as being necessary. The economy seems to be doing just fine on its own but YMMV.

Heck, if I could pull my IRA at 12%, there'd be a "huge sucking sound" as I'd be rocketing towards empty.

As it now stands, it's kind of stupid: I withdraw my RMD and then some, yet my IRA balance just keeps getting larger year after year.

OTOH, Imagine what $20 trillion hitting the economy over a short period would do to inflation!

 

[Ronstar]

I'd jump at the chance to pay a 12% flat tax on retirement account withdrawals. And I'd agree to start my RMDs right now @ two years earlier than required.

 

[stepford]

I somehow don't think there's much appetite to give baby boomers another multi-trillion dollar gift.

 

[marko]

I somehow don't think there's much appetite to give baby boomers another multi-trillion dollar gift.

Agree. And this idea makes too much sense.

So the flip side is that we just keep building tax deferred wealth on a massive scale, leaving even more millions to heirs. Even when we lose, we win.

Actually I'm more concerned about the drumbeat on taxing unrealized gains and net worth, but that's for another day.

 

[thenameiwish]

Less taxes... yes, please.

 

[Sunset]

Seems like a bad idea to me (and I am one who would personally benefit).

All the folks who have done Roth conversions in the 22 and 24% tax bracket leading up to this are penalized big time.

The hit to the US budget will be too great. The government is happy to wait til RMD's kick in collect a higher tax. Will benefit a certain group of people while making the US finances worse and sticking it to both those who converted before this '8 year window' and after the 8 year window. Imagine someone who is 59 the year this ends!

Based on fairness, this is a bad idea.

Even at younger than 59, with a 10% penalty added to the 12% would still be a cheap rate to pull out all at once anything over the 24% tax rate.

 

[Sunset]

Agree. And this idea makes too much sense.

So the flip side is that we just keep building tax deferred wealth on a massive scale, leaving even more millions to heirs. Even when we lose, we win.

.....

I thought the money inside IRA's while it does build up , the heirs are forced to withdraw all of it in pretty short order, giving the gov't lots of tax money.

 

[marko]

I thought the money inside IRA's while it does build up , the heirs are forced to withdraw all of it in pretty short order, giving the gov't lots of tax money.

Of course. Usually ten years. But in the end, the heirs could net a much bigger amount after taxes. As noted "even more millions"

 

[pb4uski]

Seems like a bad idea to me (and I am one who would personally benefit).

All the folks who have done Roth conversions in the 22 and 24% tax bracket leading up to this are penalized big time.

The hit to the US budget will be too great. The government is happy to wait til RMD's kick in collect a higher tax. Will benefit a certain group of people while making the US finances worse and sticking it to both those who converted before this '8 year window' and after the 8 year window. Imagine someone who is 59 the year this ends!

Based on fairness, this is a bad idea.

+1

 

[bada bing]

Please, get this done within the next 6 years. That would be before my RMD age.
Even make it a one time event, no need for 8 years.
I'll empty my entire tax deferred account in one go. Into a Roth conversion if you'll let me. Or even into my taxable account if not.

A little tongue in cheek. There is no way this would pass. And as much as I'd like the tax cut - and I can even make the case I "deserve it" - I'd prefer for the unavoidable looming public debt implosion to happen after I cark it. Not before.

 

[Car-Guy]

I never really believed in Santa Claus or The Tooth Fairy. But, the older I get, the more I believe in Robin Hood.

 

[GrayHare]

At this rate, all taxes will be abolished next decade, AI robots will do all the work, and Uncle Sam will print and distribute a stack of Benjamins to each of us every day. What a great country!

 

[Pointby2]

Random thoughts.

• Most folks wouldn't spend it anyway. It would go straight into a Roth. (if this forum is any indication)
• It could be limited to a set number, like the first $50-100,000
• Starting it at 59.5/60 may encourage earlier retirement
• Would have to permanent, it can't be seen as just being for "boomers"
• The same people that wanted to forgive student loans, would also not worry about the unfairness to those that paid 22-24% on Roth conversions

 

[braumeister]

I never really believed in Santa Claus or The Tooth Fairy. But, the older I get, the more I believe in Robin Hood.

As George Bernard Shaw wrote:

A government that robs Peter to pay Paul can always depend on the support of Paul.

 

[Koolau]

I somehow don't think there's much appetite to give baby boomers another multi-trillion dollar gift.

Call it a "Parting Gift."