Rehabilitating Frankenstein's Monster: Repairing the Public Policy of the Roth IRA

Abstract

The accompanying Article is not a financial planning guide on whether to contribute or convert funds into a Roth Individual Retirement Account (Roth IRA). Legions of advice already exists to help analyze that choice. Instead, the Article addresses the Roth IRA from a public policy perspective.The Roth IRA is a seemingly innocuous after-tax personal retirement savings arrangement. The law, however, has received fierce policy criticism since its enactment less than two decades ago. For example, the title of this Article stems from one such criticism. A 2011 Op-Ed admonished that the Roth IRA is a dangerous “fiscal Frankenstein” destined to “wreak havoc” on the U.S. Treasury. Notwithstanding, Presidents Clinton, Bush, and Obama have all signed off on legislation enacting or expanding the Roth IRA. Further, the public has already poured $660 billion into Roth IRAs and the inflows are growing fast.Consequently, this Article takes a fresh look at the Roth IRA. The Article does find serious flaws in the existing law. In particular, a 2014 GAO report estimated 300 people had IRAs worth at least $25 million. Similarly, a 2012 Forbes article noted that Max Levchin, a 36 years old high-tech entrepreneur, had built a Roth IRA worth at least $95 million. Skewed wealth accumulations, along with the statutory feature that allows beneficiaries to stretch distributions over their lifetimes, present serious income inequality issues. The Article therefore concludes by offering recommendations to turn the rampaging beast into a benevolent benefactor.