By: Merrill Matthews. wsj.com – April 7, 2025

Allowing one-time, taxable IRA withdrawals would produce the billions in revenue Republicans are looking for.

One of the problems Congress sought to fix in 2017 was the repatriation of U.S. multinational funds sitting in overseas bank accounts. At the time, U.S. multinationals paid the taxes due in the country where they operated, but if those after-tax profits were brought back to the U.S., the company had to pay the difference in the U.S. tax rate, which was the highest among developed economies. As a result, to avoid paying taxes, companies held some $2.6 trillion sitting overseas.

The Tax Cuts and Jobs Act fixed that problem by imposing on those funds a one-time tax of 15.5% on liquid foreign assets and 8% on illiquid assets, which were payable over eight years. It was a win-win for government and the corporations. Companies got to pay a lower tax rate, and federal coffers got a boost from the tax—estimated at the time by the Joint Tax Committee to be about $339 billion over 10 years.

Today, there are roughly $15 trillion untaxed dollars sitting in individual retirement accounts, with another $26 trillion in employer-sponsored plans. People can take penalty-free IRA distributions beginning at age 59½ or for certain specified purposes. At age 73, people are required to begin withdrawing a formula-based percentage of their funds annually. Those withdrawals are taxed as income, based on whatever income tax bracket the person is in.

If Republicans were to allow people on a one-time basis to withdraw voluntarily some portion of those funds, say up to 10%, and pay a relatively low fixed tax rate on the withdrawal, it could be beneficial for both the person and the federal government.

For example, the second-lowest 2024 federal income tax bracket is 12% for those making between $11,600 and $47,150, and for those filing jointly it’s between $23,200 and $94,300.

If the government imposed a 10% or 12% tax on the one-time withdrawals, those who fall in the five higher tax brackets might see it as an opportunity to retrieve some of their funds at a lower tax rate.

Kiplinger reports that baby boomers have, on average, about $250,000 in their IRAs, and Gen Xers about $100,000. If they could withdraw up to, say, 10%, that would mean up to $25,000 for boomers who have the average amount. The numbers could multiply if the proposal were extended to fully vested holdings in 401(k)s and other employer plans.

Some people may have more in their accounts, and they are the ones likely to withdraw large sums if they believe they have more than enough to provide for their retirement needs.

Allowing the taxed withdrawal should be fairly easy. When people withdraw funds from an IRA now, they are usually given the option to have taxes withheld. All one would have to do is click a button and the tax would be withdrawn with the remainder going into the person’s designated account. Once withdrawn the money could be used for any purpose.

Would this option meet the Republicans’ budget shortfall? Doubtful, given the big hole they’re trying to fill. But this proposal has never been tried, so it’s anyone’s guess how many people would voluntarily take advantage of it.

The end result could be billions, perhaps hundreds of billions, of dollars in new federal revenue, helping Republicans offset the funding gap.

Mr. Matthews is a co-author of “On the Edge: America Faces the Entitlements Cliff.”

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Source: A Retirement Account Fix for the Funding Gap – WSJ