Why are there income limits for Roth IRAs?

Question

Why does the IRS establish a Modified AGI limit for contributions to Roth IRA accounts? I can understand having a limit for Traditional IRA accounts because the government doesn't want to lose out on taxes in a high tax bracket, but Roth IRA contributions are after-tax anyway.

score 23 · Accepted Answer · answered Dec 04 '15 at 16:49

Because Congress said so. Now, if you're asking for the legislators' rationale, it's something along the lines of:

We only create tax shelters when we "need" to; otherwise we just make our deficit worse for no reason. Absent a particular need, better to just lower the tax rate in general.
It's a national priority that people be able to secure their retirements.
High income earners already have secured retirement, so no further tax shelter of retirement income needed.
Middle income earners need the tax shelter, both for practical help saving, and to encourage them to do so in the first place.
end result... income limit on IRA contributions.

Of course, not everyone in Congress agrees with all of the above reasons. I'm sure there are PLENTY of legislators that vehemently disagree with the idea of income limit for contributions.

But like everything else, it's the result of lots of compromises over a host of issues. But that's the general idea that most legislators could rally around, or they wanted something else in the bill, or they wanted to provide political support to their party leader, and didn't object to this enough to fight it, so that's what the majority approved.

score 10 · Answer 2 · answered Dec 04 '15 at 15:21

10

A Roth IRA is still a tax shelter. It allows for tax-free gains.

answered Dec 04 '15 at 15:21

Andrew

179
6

score 4 · Answer 3 · answered Dec 04 '15 at 15:22

Roth contributions are after tax, but the earnings thereafter are tax-free. So, the government doesn't permit high earners to take advantage of this and shelter their earnings from taxes this way. It's not really different from a traditional IRA in that; it's just different in when the earnings are taxed versus tax-free.

score 0 · Answer 4 · answered Dec 04 '15 at 16:00

As all of these answers here are purely anecdotal and would be equally as anecdotal/uninformative no matter what the income limits were, you can alternatively write the IRS to ask their rationale. Similarly you can look for the law authorizing the IRS to modify income limits for the Roth IRA contribution privilege.

Typically the tax code is riddled with compromises based on a perceived inequalities on how the government levies taxes.

Why are there income limits for Roth IRAs?

4 Answers4