Obama’s IRA Money Grab? A Modest Proposal

Banks are effectively nationalized; banks are branches of federal governments in the western democracies in all but name.  All western democratic governments are in fact if not officially bankrupt.  Bankrupt governments are searching for cash anywhere they can find it.  That’s the three part syllogism leading to the conclusion that is rampant on the web: governments will eventually confiscate all the money in the banks and in savings accounts.

It’s hard to argue that this is simply paranoia when, as part of the bailout of Cyprus, the Commissars Commissioners of the EU confiscate 6.5% to 9.8% of all deposits in Cypriot banks.  This sort of bald-faced money-grab leads to headlines in the more “passionate” parts of the press.  It gets the rabble roused.  And roused some more.

Once the first hard example of confiscation pops up, even if it’s on an island I’d wager 80% of Americans couldn’t point to on a map, the flood gates open wide.

The counterpart of Cypriot taxes on bank deposits, here in the States, is the current hysteria that Obama’s going to confiscate all the assets in our retirement accounts … IRA, 401k, 403b, SEP-IRA etc. … and forcible replace those assets with US Treasury bills, notes and bonds.  A variation on this theme is that rules would be put in place forcing those accounts to hold a certain percentage, say 50%, of their value in Treasuries.

This, it’s alleged, would be rationalized by Obama and the Democrats in Congress as insuring the safety of the value of the accounts.  It “would be for our own good.”  It would shield the accounts from the vagaries of the stock and commercial credit markets by replacing those “dangerous” auction-priced securities with “safe, secure” government-managed IOUs.

Four years ago I’d have given the possibility of such a confiscation and replacement or such a mandated 50% Treasury demand about 0% chance of happening.  I have to raise that to 50% chance today, over the rest of Obama’s second term reign.

Now, I’m not a conspiracy theorist; I don’t see powerful, dark forces ruling the world from shadowy walnut-paneled chambers deep in the bowels of Davos.  The Bilderbergs are no more a threat than the Hapsburgs these days.  The Masons don’t own a fleet of black helicopters.  Trilateral Commission founder David Rockefeller can’t find his butt with both hands much less master the universe.

The reason I’ve raised … or lowered, depending on your point of view … the odds of such a forced federally-mandated replacement of private assets with Treasury debt to 50% is that this is essentially what Europe has done.  In Europe employees are required to put a fixed percentage of their gross wages into retirement accounts.  While those accounts belong to them individually, as IRAs and such like do here in the States, it’s the central government that is responsible for “investing” that money.  And a great deal, upwards of 50% or more, goes into central government debt.

I’d like to suggest an alternative.  The reason the Feds are interested in retirement accounts at all is the same reason there’s a library full of rules governing them.  Most of the balances in those accounts are pre-tax.  When they are withdrawn … a process that must begin in your 70th year if not earlier … they are taxed as regular income.  The untaxed portion of those accounts is like financial heroin to Congressional and Administration spendaholics.

They want that tax money.  Now.  So I say give it to them.  Now.  Before they make a money-grab.

I say:  Declare all balances in tax-deferred accounts of any and all kinds taxable, perhaps spread over the next 10 years.  Spread it out so as not to distort the tax rate too much.  Even better set a fixed rate of taxation for all one-time “converted” balances, say 20% or 15% or the long term average rate of 18.8%.  Choose one, pay the tax and destroy a library full of rules for what you can and can’t do with your own money.  Destroy something more important, too.  End the “Cyprus Option”.

I say:  End the 50% chance of having the Feds step in to dictate what the contents of your IRA must be.  End the 50% chance of a 6.5% to 9.8% “surcharge” on your untaxed IRA balances.  This is especially important because ravenous, bankrupt governments tend to want to means-test everything … in the case of Cyprus the higher rate applies to larger individual and corporate accounts.

Congress would never get away with telling you what you must invest in with money in your non-retirement accounts, your open market brokerage accounts, would they?  The push back would be enormous.  The leverage they’d try to use because IRAs contain untaxed income would be permanently gone once there were no more untaxed balances.

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Special section for math wonks:  If I pay 20% on $10,000 today, leaving me $8000, then grow that at 5% per year compounded for 10 years I end up with $13,031.  If I grow $10,000 at 5% per year compounded for 10 years I end up with $16,288, less 20% tax leaves me $13,031.  It doesn’t matter whether I pay that 20% tax on the front end or the back end.

There is the issue of taxation on the earnings in the first example: on the $5,031 earned over 10 years outside of a tax-deferred account.  That could be part of the negotiation over the initial rate.  If we drop the initial one-time rate to, say, 14% or so we’d end up in roughly the same place after 10 years; $13,031.

There is, however, a much better alternative.

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Here’s what I’d demand in return for a flood of tax receipts right now … a mouth-watering prospect for a bankrupt Congress.  I’d demand that balances withdrawn from tax-deferred accounts like IRAs be taxed, then converted into tax-exempt accounts.  Specifically into Roth accounts, never to be taxed again on balances and earnings.  That’s how Roth IRAs work today, so there’s nothing new or unusual about this conversion.  That’s what I’d demand:  all pre-tax IRA balances taxed once … either averaged over 10 years or at a negotiated fixed rate … and never again.  Ever.

If I could get 10 year averaging or a reasonable one-time tax rate, neither of which is available today of course, I’d convert my existing IRAs into Roths in a heartbeat.

Just a modest proposal.  One more way to get the damned IRS off our backs and a bankrupt federal government out of our pockets and our lives.

 

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