Senator Upset About Roth IRA Back Door

Just this Friday I was discussing what I believed to be a screw up by Washington bureaucrats in allowing a back door method to get around Roth IRA income limitation, only to discover that at least one angry senator is standing in the rear entrance, yelling to barricade the loophole before an undead army of upper middle class savers shambles through it.

Ron Wyden (D – Oregon, which in assuming is short hand for the Oregon Ducks) just this weekend put forward his Retirement Improvement and Saving Enhancement bill. More importantly than what the bill says, he managed to make the acronym RISE out of his new law’s title, though rising and retirement have a pretty tenuous relationship. I mean, what good is retirement if you can’t sleep in a little?

Like all laws at this stage, there’s little chance it’ll pass as is. Maybe a mutated version of it could go the distance.

The two main goals of the apparent University of Oregon fan is to help more working families and recent college graduates save for retirement, and crack down on “mega Roth IRAs.”

The law has a few good parts to it. For example, it ups the age of Required Minimum Distributions (or RMD, which definitely sounds like something we should be worried about North Korea getting their hands on) from 70.5 to 73, with plans under $150,000 not requiring RMDs at all. That certainly makes sense to me. I’m honestly not sure what the point of these RMDs are anyway, but I’m just a tax accountant. Maybe Congress is trying to keep the IRA out of the grubby hands of money loving relatives when the retiree dies?

Ideally, Congress would like to craft the Retirement of Mass Destruction

Ideally, Congress would like to craft the Retirement of Mass Destruction

Closing the Roth IRA back door is also a fine idea. I doubt the drafters of the original Roth IRA law sat around saying, “You’ know what would be awesome! If we crafted our law so all those income limitations we wrote in are totally pointless!” I mean, yeah, it sucks for people who are sneaking in the back way, but that clearly wasn’t the point of the law in the first place.

Those proposals are just playing with the fringes of retirement law. The Saving Enhancement part of the bill will likely be more controversial.

The first part allows the tax “Saver’s Credit” to be refundable directly into a qualified retirement plan, meaning if you get money back on your return through this credit, it goes straight into Uncle Schwab’s hands until you’re old enough to use it wisely.

The next Saving Enhancement is to allow employers to make matching contributions to a 401(k) based on how much the employee makes in student loan repayments. You know, for all those recent graduates who instead of following their grumpy grandpa’s practical advice to get an accounting degree at a reasonably price school went with their History teacher’s advice to follow their degree dreams at whatever school they want because the funding will take care of itself.

That’s at least what my History teacher told my class.

Not that there’s necessarily a problem with employers contributing to a 401(k) for employees who can’t afford it, but leaving it just for recent graduates paying off student loans seems a bit. . .well, like Wyden is trying to lure Millennials in California’s Canada to vote for him. There are plenty of people who “cannot afford to save money,” not just recent college grads.  Especially since it’s typically not the recent college grad who is defaulting on student loans, but the part time student single parent who’s just going in for some training and probably never gets an actual degree.

I’m sure they’ll factor that all in. I mean, surely they learned from that time they totally screwed up and left a massive back door that totally undoes half of the rules they wrote. But this is Congress.

The RMD thing is legit, though. Credit where credit’s due.