The Curious Evolution of Individual Retirement Accounts
30 Pages Posted: 11 Aug 2000
Date Written: 2000
This article analyzes recent legislative and economic developments that have transformed the "individual retirement account" (IRA) from a modest retirement savings vehicle into an all-purpose savings account. Specifically, it examines three statutory provisions that allow withdrawals to be made from IRAs without the application of the usual penalty for pre-retirement distributions. These provisions pertain to withdrawals made to purchase a home, fund higher education costs, and pay for medical expenses. The article shows that withdrawals made for such purposes are ill-advised, since tax-favored means of addressing these needs without jeopardizing one's long-term retirement security already exist. Accordingly, these provisions represent bad tax policy and should be repealed.
This article then examines the increasing use of large balance IRAs as inter-generational wealth transfer vehicles rather than as retirement funding mechanisms. The newly created Roth IRA represents especially bad policy, since a Roth IRA need never pay out any distribution to its holder, regardless of that person's age. But even regular IRAs allow an account holder's heirs to spread distributions from an inherited IRA over their own lifetimes, thereby extending the IRA's tax deferral inappropriately. The article then makes statutory recommendations to better implement the IRA's purpose of funding one's retirement.
Note: This article was originally published in the Elder Law Journal, Vol. 7, P. 283, 1999 under the title "Retirement Funding and the Curious Evolution of Individual Retirement Accounts."
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