Most people hold retirement savings in an IRA/401K or Roth IRAs.
Contributions to the standard IRA or 401K are called “tax-deferred” because they are made with pre-tax dollars. The taxpayer receives a tax deduction for those contributions. Withdrawals from tax-deferred accounts are taxed as ordinary income and subject to the filer’s tax rate in the year withdrawn.
Contributions to Roth IRA’s are made with after-tax dollars, and are therefore free of taxation when withdrawn.
Taxable IRA’s can be “converted” to non-taxable Roth IRA’s by withdrawing the taxable funds and paying the tax on the funds. Once converted, the funds are tax-free.
The current value of taxable IRA/401k accounts is approximately $40 TRILLION dollars.
The federal government should consider a one-time Roth conversion plan at a flat tax rate. Any amounts converted would be subject to a 12% tax during the tax period.
This concept is similar to the corporate capital repatriation plan in the Tax Cuts and Jobs Act of 2017, under President Trump. Under that plan, corporations were encouraged to repatriate foreign holdings with a flat 15.5% tax rate. The plan brought over $1 trillion in taxes into government coffers.
Why not try the same thing and apply it to IRA/401K withdrawals?
This would encourage taxpayers to convert all or part of their taxable retirement accounts NOW and pay a lower tax rate during the tax period.
The government would receive less taxes NOW than it would in the future from the same funds, but the higher tax receipts could be used to pay down the national debt sooner than later.
It’s a win-win for everyone…taxpayers and government.