Roth Seeks Higher IRA Limits

The originator of the Roth IRA next week will call for an expansion of individual retirement accounts as part of the effort to shore up the nation’s retirement system.

Sen. William V. Roth Jr. (R-Del.), chairman of the Senate Finance Committee, will propose doubling to $4,000 the amount individuals can invest each year in Roth IRAs, according to spokeswoman Ginny Flynn. He’ll also call for an unspecified increase in the amount taxpayers can contribute to traditional IRAs and will push for changes in private retirement plans.

“If you like the Roth at $2,000 [the current annual contribution limit], you’re going to love it at $4,000,” said Greg Schultz, principal at Asset Allocation Advisors based in Walnut Creek.

But if all Congress does is increase the amount individuals can contribute each year, financial planners doubt such a move would encourage more Americans to convert to these tax-advantaged accounts--surprisingly few have thus far--or open new ones.

“We’re really preaching to the choir,” Schultz said.

Adds West Los Angeles financial planner Joel Framson: “Realistically, I don’t think it’s going to spur more people to open [new] Roth accounts.”

That’s because “none of this solves the basic dilemma--the reason why more people don’t open Roth IRAs--which is the tax issue,” Framson said. “People are wondering, ‘Is [the money in a Roth account] really going to be tax-free down the road--or is this going to be another case of the government promising something now but changing its mind later?’ ”

With a traditional IRA, an individual can deduct contributions from taxable income. And while the money in the account grows tax-deferred, it will be taxed at one’s income tax rate upon withdrawal. With a Roth IRA, which was created in 1997, individuals pay taxes on contributions up front and withdraw it later tax-free.

Roth will make his proposal as President Clinton hosts a two-day conference Tuesday and Wednesday to discuss ways to shore up the ailing Social Security system, which is expected to begin paying out more than it collects in revenue in 2013.

Roth will argue that Social Security is only part of the problem. “Social Security was never meant to be the only source of income for people in retirement,” Flynn said. “The chairman wants to make sure other options are there for Americans.”

As chairman of the Finance Committee, Roth has the power to put his proposals at the forefront of the congressional agenda.

One of his priorities will be to make it easier for consumers to convert traditional IRAs to Roth IRAs, Flynn said. Currently, both individuals and couples earning more than $100,000 are barred from converting an IRA to a Roth IRA.

“The government could make it a lot easier for people to convert simply by increasing the income limit,” said Framson, noting that a simple solution would be to double the income limit for married couples.

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Yet even among individuals now eligible to convert, surprisingly few have done so, according to bank, brokerage and mutual fund reports.

Financial planners believe this is because of the reluctance of many investors to pay taxes up front, along with the fear that one day the federal government may tax the money.

Roth also plans to push for a simplification of pension rules, to make it easier for employers to administer and workers to understand their plans, Flynn said. He also would like to make it easier for workers to take their pension plans with them when they change jobs, she said.

To bolster the number of small businesses offering retirement plans, Roth would also like to create new, and simpler, pension options.

There are “a plethora of rules and regulations that make the [current] systems very complicated,” she said.

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Roth’s Proposals

Sen. William Roth, creator of the Roth individual retirement account, plans to propose:

* Doubling to $4,000 the amount individuals can invest each year in Roth IRAs.

* An unspecified increase in the amount taxpayers can contribute to traditional IRAs.

* Simpler pension rules, to make it easier for workers to understand their plans and take them with them when they change jobs.

* Simplified pension plans designed for smaller businesses.

Source: Bloomberg News