Report: Loosening IRA Distribution Bad News For Fiscal Future

July 23, 2003 ( - Before the dust has even had a chance to settle surrounding the US House of Representatives markup of HR 1776, a new report labels the legislation as an example "of attractive-sounding measures that the nation now can ill afford."

The criticisms come from a report by the Center for Budget and Policy Priorities (CBPP) authored by Peter Orszag, a senior fellow at the Brookings Institution, and Robert Greenstein, executive director of CBPP. Primarily, the report warns of the impending doom looming on the nation’s fiscal horizon by providing additional tax subsidiaries to high-income individuals though a loosening of the rules governing how soon 401(k) participants and individual retirement account (IRA) owners must begin taking distributions from their accounts contained in the most recent marked up version of the Pension Preservation and Savings Expansion Act (See Portman-Cardin Sent To House Floor ).

Specifically, high-income individuals would be able to accumulate substantial estates rather than to provide income during retirement by moving required distributions from such accounts to 75 from the current 70 ½, the report finds. In that case, the report reasons, the tax preferences associated with pensions and IRAs would not be serving their basic public policy purpose of bolstering retirement security and come at a price tag as $24 billion over 10 years.

Additionally, the report points to the problem of potentially discouraging work among high-income retirees. This occurs because under current regulations retirees between age 70½ and 75 needs to continue working if they intend on not withdrawing any funds from a 401(k), since the rules requiring distributions to start at age 70½ do not apply if the individual remains employed. However, the marked up version would enable such individuals to retire without having to make any withdrawals from their 401(k)s until age 75.

Some Good

However, Orszag and Greenstein did not throw the bill completely under the bus, highlighting a perceived beneficial change in the expansion of the “saver’s credit” createdunder the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)in the 2001(See Credit Worthy ). The report says that be expanding this credit saving among middle and lower earners would be encouraged.

But, as with the majority of the report, the means to the end could have been gone about differently, the duo finds. Specifically targeted is the approach the marked up version of the bill takes in not making the credit refundable. Thus, the credit only continues to be of little or no benefit to “millions of workers with modest incomes, and the very workers who most need to boost their retirement saving,” the report found.

Continued Questioning

The questions raised in the report are hardly new. A bout a week ago, a “Dear Colleague” letter in opposition to that provision in HR 1776 was circulated and signed by a dozen Democrats (including Representatives Pete Stark, Robert Matsui, and Charles Rangel), who took issue with raising of the minimum required distribution age to 75 from the current 70.5. The letter claims that changing the rule “creates an additional tax break for those who need it least.” It also says the rule would only help “wealthy individuals in their early to mid-70s who do not need their money for retirement.”

However, the markup of the bill was disrupted by a dispute over process in which Democrats used a parliamentary procedure requiring the reading of the chairman’s mark to gain time to review the bill outside the chamber, though an objection to ending the reading was deemed “too late.” Committee Republicans approved the bill with no Democratic members present sparking a congressional brouhaha. Had the markup proceeded as planned, the provision loosening the minimum distribution rules was expected to push many Democratic members to vote against the bill.

A full copy of the report is available at