Ron Paul's Texas Straight Talk - A weekly Column

July 24, 2000

Lower Taxes Encourage Saving for Retirement
Legislation Will Allow Increased Contributions to Tax Deductible IRAs and Tax-Deferred Pensions

This week the House of Representatives voted to support H.R. 1102, the "Comprehensive Retirement Security and Pension Reform" bill. The bill increases the deductible amounts individuals may contribute to their IRAs, while also increasing tax-deferred amounts that may be contributed to 401(k) pension plans. While I certainly supported the bill based on its tax relief, I also applaud the underlying principle of encouraging private retirement saving by allowing individuals to keep more of their paychecks. American taxpayers know that the best way for them to save for their retirement is to invest their pre-tax dollars in private pensions and retirement accounts. Taxpayers, rather than the federal government, should be the stewards of their own hard-earned retirement savings.
Taken together, the contribution increases contained in H.R. 1102 represent a positive step in the right direction. Specifically, H.R. 1102 raises deductible IRA contribution amounts from the current $2,000 to $5,000 over the next three years. This raise was badly needed, as the $2,000 limit has been in place since 1981. Beginning in 2004, the $5,000 IRA contribution limit will be indexed to inflation in $500 increments. Similarly, contributions to 401(k) and like pension plans are raised from the current $10,000 to $15,000 over the next five years. In 2005, further increases will be indexed to inflation in $500 increments. These raises will reduce the tax bills of millions of Americans who always contribute the maximum amount allowed to their IRAs and pensions.
The bill contains other worthy provisions. "Pension portability" is enhanced, making it easier for employees who change jobs more often in today's economy to move their pension savings to another type of plan. This is accomplished by relaxing the "roll-over" rules, which dictate the time in which individuals may make a tax-free transfer of their pension when they start a new job. Americans over 50 also benefit from the "catch-up" provisions contained in the bill. Individuals 50 and over may contribute $5,000 to their IRAs immediately beginning in 2001, in addition to the amount that they would otherwise be allowed to contribute. Thus, by 2003 such an individual could contribute a total of $10,000 to an IRA. This larger deduction will allow older taxpayers to quickly expand their retirement savings, at a time when many people are concerned that they may not have saved enough to support themselves when they stop working.
I have introduced legislation that would have provided faster pension and IRA tax relief. In 1999 I introduced H.R. 802, a bill which would have immediately raised the annual deductible IRA contribution amount to $5,000, without the gradual increments of the current bill. I also co-sponsored bills in 1999 which would have allowed a tax credit for contributions to IRAs and broadened penalty-free withdrawals from IRAs. Still, H.R. 1102 does provide real tax cuts for American taxpayers. Individuals will be able to reduce their income tax bills immediately with an increased IRA contribution deduction, while putting more of their paychecks into tax-deferred pensions.
Our tax laws generally discourage private saving. H.R. 1102, like my pension reform proposals, focuses on increasing saving by increasing the tax deductions and tax deferrals available to individuals. We can encourage retirement saving simply by allowing employees to put more of their paychecks into IRAs and pension funds, instead of sending taxes to the federal government. More than ever, Americans know that their own private retirement savings will be critical to their standard of living during their later years.