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 Take the regulations governing when people are required to begin
withdrawals from their accounts, which is by April 1 in the year
following the year they turn 70-1/2.
"It's extraordinarily complex and unnecessary," said Melissa Labant,
director of tax advocacy for the American Institute of CPAs (AICPA).
Making matters worse is the fact that different types of retirement
accounts have different rules. Required minimum distributions cannot
be delayed for IRAs, but they can be put off for 401(k)s if the
account owner is still working - and does not own more than 5
percent of the company sponsoring the plan.
People who get confused can pay a big price. Failure to take a
required minimum distribution on time, for example, can result in a
penalty equal to 50 percent of the amount that should have been
withdrawn.
The AICPA has the following eminently reasonable suggestions for
simplifying tax law for retirement accounts:
1. Push back the age for required minimum distributions.
The government wants its due, of course, but required minimum
distributions can shove people into higher tax brackets and make
more of their Social Security benefits taxable.
Changing the age at which we have to start mandatory withdrawals to
80 would not only get rid of the 70-1/2 nonsense, but would also
allow people to keep their savings snug in a tax-deferred account
longer. This would reduce the odds of running out of money in old
age.
2. Unify the withdrawal rules.
The ability to delay mandatory withdrawals from 401(k)s but not IRAs
is just one example of inconsistent rules. Another difference is
which withdrawals are penalized. Those from IRAs do not incur a 10
percent federal tax penalty if the money is used to pay higher
education expenses or finance a first-time home purchase.
Withdrawals from a 401(k) for those purposes would incur the
penalty.
3. Give all withdrawals more favorable tax treatment.
When you make nondeductible contributions to a retirement plan,
which means you have already paid the tax on that amount as income,
they are not taxed when you later make withdrawals. But the
specifics vary by account.
When you make withdrawals from a Roth IRA or a 401(k), the rules
treat it as if you were first taking out the nondeductible
contributions, Labant said. If you do not withdraw more than the
amount of those contributions, the distribution is not taxed.
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The same withdrawal from an IRA, however, would be taxed
proportionately. If nondeductible contributions made up 20 percent
of the account's value, then only 20 percent of the withdrawal would
escape tax. Changing the rules so all distributions are deemed to
come first from any nondeductible contributions would simplify
matters and reduce tax bills, Labant said.
4. Lift the income limit for Roth contributions.
Roths are hugely popular among savvy taxpayers because both
contributions and earnings can be withdrawn tax-free in retirement.
Also, Roths do not have required minimum distributions, which means
the money can keep growing for a lifetime.
The ability to contribute to a Roth is limited by income, but
Congress created a huge loophole when it removed income limits for
Roth conversions. Now people who make too much to contribute
directly to a Roth can instead contribute to a regular IRA and soon
after convert that money to a Roth in what is known as a "backdoor
Roth."
If the taxpayer does not have other regular IRA savings, she does
not incur much if any tax on the conversion. President Barack Obama
in his budget proposal for fiscal-year 2016 suggested closing this
loophole, but the AICPA would rather see income limits removed on
contributions.
Income limits and phase-outs "have contributed to the complexity and
opaqueness of our tax law," Labant said. "Good tax policy requires
simplicity and transparency."
(The author is a Reuters columnist. The opinions expressed are her
own.)
(Editing by Beth Pinsker and Matthew Lewis)
[© 2015 Thomson Reuters. All rights
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