In less than one generation this country has seen a shift in retirement plans from defined benefit, i.e., a pension, to defined contribution, i.e., various IRAs. This suits a mobile population where neither employer nor employee have much loyalty to each other and job security is never guaranteed. The reality, however, is that in the future fewer people than ever will be financially prepared for retirement. Fewer people prepared will mean more demands for social services at a time when those are being squeezed. I’ll offer a solution that may help some people avoid future requests for social services and does not require expenditure of our tax dollars today.
Roth IRAs are funded with after-tax earnings and the growth in value is tax free as long as certain conditions are met. Change the law requiring them to be funded with earned income as follows. Allow families to open a Roth IRA for a child and fund it up to a specified maximum, e.g., $25,000-$50,000. This would give the account up to 18 additional years to grow, and time is the investor’s friend. Contributions once made could not be withdrawn. At age 18 the initial contribution plus any growth would be locked for retirement use only. That money couldn’t be taken to buy a house, pay for college, etc.. I call this RYRA, the Roth Youth Retirement Account.
Since a Roth IRA is funded with after-tax money this proposal is not any kind of tax shelter for the rich. It’s simply following the great tradition of allowing families to help their own at a time when it will do the most good.