Here’s a thought exercise for you…
One of the main reasons to choose a Roth IRA over a traditional IRA is that you can pay taxes now in return for tax-free distributions later. This is also good from the Federal Government’s perspective, as it allows them to collect taxes right now vs. sometime down the road.
In fact, the elimination of income limits for making traditional-to-Roth IRA conversions, along with the fiscal cliff legislation paving the way for in-service traditional-to-Roth conversion in qualified plans are both excellent short-term revenue generators — again, at the expense of collecting more taxes down the line.
So that got me to thinking. If the Feds are so keen on raising revenue today without much though for the future consequences, why not allow people to effectively buy higher Roth contribution limits?
As things stand, the penalty for excess contributions is 6%/year until the money is removed. That’s onerous enough that people won’t put in extra as an investing strategy. But if they found a more reasonable (and non-recurring) price point, they could generate a ton of extra cash buy letting people pay a premium to stash extra cash.
What would a reasonable price be? I’m not sure. You’d have to make it attractive enough to investors that they’d do it without completing mortgaging the future. Then again, Congress has never been averse to mortgaging our future, so perhaps that’s not an issue.
It would also be important to keep a somewhat level playing field — it wouldn’t be fair to let high income earners dodge their higher tax rates for the same price as lower income earners with lower tax rates — so perhaps the price would have to vary depending on your marginal tax bracket.
So, dear readers, what do you think? Would you be willing to pay a premium to stash extra money in a Roth IRA? If so, how much?
Keep in mind that your contributions are already subject to income taxes — what I’m talking about is an amount on top of that for any dollars in excess of the prevailing contribution limit.