Wednesday, April 18, 2012

First Warning On End Of Tax-Advantaged Retirement Accounts

The federal government will somehow close its enormous budget deficit.  The effort begins with demarcation of boundaries.  The debate so far does not include reforms of Social Security or Medicare as the Simpson-Bowles commission urged.  Those are popular handouts that are highly visible in the lives of the lower middle class and working poor.  The debate has instead begun with tax breaks that the middle and professional classes use to build wealth and prepare for a self-sufficient retirement.

Lawmakers have begun discussing "changes" to tax-advantaged retirement accounts.  The only real change this could mean is the elimination of the tax-free treatment of gains in these accounts.  It's funny how some brokerages have been encouraging clients with traditional IRAs to convert them into Roth IRAs in the hope of enjoying tax-free withdrawals someday.  That hope is probably going to be dashed in a few years.  Investors who converted their IRAs paid a tax penalty and probably wasted a chunk of capital in light of what's likely coming.

I had wondered whether financial repression measures would have simply limited retirement accounts to buying only government debt, but this emerging discussion will simply neutralize the accounts altogether.  Poor people don't have IRAs but they do love Medicare.  The end of tax-free retirement investing means taxes will be raised on the middle class's passive earnings to preserve transfer payments to the poor.  Those who intelligently saved for retirement will be punished and their meager wealth will be reduced to benefit those who chose not to save.  This is redistributive policy at its worst. Don't say you weren't warned.

Full disclosure:  I have an IRA.