Individual Retirement Accounts

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                  Vol. 2, No. 4: March 1, 2001
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Publisher:     Legal Scholarship Network
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               Urban Institute
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TOPIC of this ISSUE: INDIVIDUAL RETIREMENT ACCOUNTS
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Asset Allocation: IRAs and 401(k)-Type Plans"
      EBRI Notes, Vol. 21, No. 10, October 2000
     CRAIG COPELAND
        Employee Benefit Research Institute (EBRI)

"IRA Assets Continue to Grow"
      EBRI Notes, Vol. 22, No. 1, January 2001
     CRAIG COPELAND
        Employee Benefit Research Institute (EBRI)

"The Roth IRA Cuts Federal Revenues, With No Benefit to
Taxpayers"
      Detroit College of Law/Michigan State University Law
      Review, pp. 39-49, 1999
     MICHAEL WAGGONER
        University of Colorado at Boulder, School of Law

"The Curious Evolution of Individual Retirement Accounts"
      Tax Notes, Vol. 87, P. 671, 2000
     RICHARD L. KAPLAN
        University of Illinois at Urbana-Champaign
        College of Law

"Modeling IRA Accumulation and Withdrawals"
      National Tax Journal, Vol. 53, No. 4, Part 1, December 2000
     JOHN SABELHAUS
        Congressional Budget Office

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Benefits, Compensation and Pension Law we do not referee working
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Benefits, Compensation and Pension Law whose topics suit the
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N E W and F O R T H C O M I N G Articles
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"Asset Allocation: IRAs and 401(k)-Type Plans"
EBRI Notes, Vol. 21, No. 10, October 2000

BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=257504

Contact: CRAIG COPELAND
   Email: Mailto:copeland@ebri.org
Postal: Employee Benefit Research Institute (EBRI)
           Suite 600
           2121 K Street, NW
           Washington, DC 20037-1896 USA
   Phone: (202) 775-6356
     Fax: (202) 775-6312

Paper Requests:
Contact Alicia Willis at Mailto:willis@ebri.org, or 2121 K St.,
NW, Suite 600, Washington, DC 20037-1896. Phone:(202)775-9132,
Fax:(202)775-6312.

ABSTRACT:
As individuals accumulate assets for their retirement, one of
the most important decisions --after the first necessity of
saving money--is how the assets are invested. The distribution
of the savings across stocks, bonds, money market accounts,
savings accounts, and other investments is referred to as asset
allocation; once money is saved, its allocation (how it is
invested) determines how fast it will grow. Equities (stocks)
have historically had higher rates of return, over time, than
interest-earning investments such as bonds and money market
accounts, leading to faster capital accumulation. Because of the
critical importance of how retirement savings are invested, the
Employee Benefit Research Institute (EBRI) has examined the
asset allocation of 401(k) retirement savings plan participants
in the past, most recently by using the EBRI/ICI 401(k)
participant database. This article supplements that research
with data from the Survey of Consumer Finances (SCF), conducted
by the Federal Reserve, to study the asset allocation of family
heads in both individual retirement accounts (IRAs) and
401(k)-type plans. (The Fed's SCF measures wealth at the family
level, so its findings are presented as percentages of American
families and/or family heads, rather than all individuals.)

JEL Classification: G11, G23
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"IRA Assets Continue to Grow"
EBRI Notes, Vol. 22, No. 1, January 2001

BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=256576

Paper Requests:
Contact Alicia Willis at Mailto:willis@ebri.org, or 2121 K St.,
NW, Suite 600, Washington, DC 20037-1896. Phone:(202)775-9132,
Fax:(202)775-6312.

ABSTRACT:
Individual retirement account (IRA) assets continued their sharp
growth in 1999,reaching $2.47 trillion and representing a 21.9
percent growth rate from 1998 (table 3). Since 1994, IRA assets
have increased approximately $1.4 trillion, translating into an
average annual growth of just over 18 percent. If this growth
continued in 2000,IRA assets would total more than $2.9
trillion. Most of the recent growth in IRA assets does not seem
to be coming from new contributions, but rather from investment
gains and rollovers from other tax-qualified retirement savings
plans.

Keywords: Individual retirement accounts (IRAs), Pension plan
assets

JEL Classification: G23
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"The Roth IRA Cuts Federal Revenues, With No Benefit to
Taxpayers"
Detroit College of Law/Michigan State University Law
Review, pp. 39-49, 1999

BY: MICHAEL WAGGONER
University of Colorado at Boulder, School of Law

Contact: MICHAEL WAGGONER
   Email: Mailto:waggonem@spot.colorado.edu
Postal: University of Colorado at Boulder, School of Law
           CB 401
           Boulder, CO 80309 USA
   Phone: (303) 492-8048
     Fax: (303) 492-1757

ABSTRACT:
Over the life cycle of an IRA, a Roth IRA will produce
substantially lower federal tax revenues than will a regular
IRA. With the Roth, the tax is only on the contribution; with
the regular IRA, the tax is only on the distribution. Over the
long time on average between pension contribution (starting in
ones teens or twenties) and distribution (lasting into ones 70s
or 80s), tax-free compounding of earnings will make the
distribution far larger than the contribution. For example, with
a 9% rate of return, a contribution will grow 32 fold over 40
years. Thus a tax on distributions will produce far more revenue
than will a tax on contributions. In the example, with constant
taxes, 32 times as much revenue.

Yet mathematically, with constant tax rates, the Roth and the
regular IRA are equivalents: The exemption of the distributions
in a Roth has the same value to the taxpayer as does the
deduction of the contribution in the regular IRA. Thus the
substantial reduction in federal tax revenues over the life
cycle of a Roth provides no benefit to the taxpayer. The article
recommends prospective elimination of the Roth IRA.

JEL Classification: H24
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"The Curious Evolution of Individual Retirement Accounts"
Tax Notes, Vol. 87, P. 671, 2000

      BY: RICHARD L. KAPLAN
              University of Illinois at Urbana-Champaign
              College of Law

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=229580

Paper ID: U Illinois Law & Economics Research Paper No. 00-03
Date: 2000

Contact: RICHARD L. KAPLAN
   Email: Mailto:RKAPLAN@law.uiuc.edu
Postal: University of Illinois at Urbana-Champaign
           College of Law
           504 East Pennsylvania Avenue
           Champaign, IL 61820 USA
   Phone: (217) 333-2499
     Fax: (217) 244-1478

    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."

Paper Requests:
Contact: Sally Cook, University of Illinois College of Law, 504
E. Pennsylvannia Ave., Champaign, Illinois 61820. Phone: (217)
333-9851. Fax: (217) 244-1478. Mailto:scook@law.uiuc.edu

ABSTRACT:
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.

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"Modeling IRA Accumulation and Withdrawals"
National Tax Journal, Vol. 53, No. 4, Part 1, December 2000

BY: JOHN SABELHAUS
Congressional Budget Office

Contact: JOHN SABELHAUS
   Email: Mailto:johnsa@cbo.gov
Postal: Congressional Budget Office
           House Annex 2, SW
           Washington, DC 20515 USA

ABSTRACT:
Empirical analysis of IRA accumulation and withdrawal patterns
is limited because information about IRA balances and flows is
not available for a sample of taxpayers. This paper combines
survey data on IRA balances with individual tax return data on
IRA flows to study IRA accumulation and withdrawal patterns
across cohorts. The analysis shows that IRA rules such as
penalties for early withdrawals and minimum distribution
requirements have predictable effects on IRA flows. The
estimated propensities to contribute to IRAs, rollover from
pensions, and withdrawal from IRAs are used to project IRA flows
and balances in the near to medium term.