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Homenew road to retirementHere's how retirement plan tax breaks may widen racial wealth gaps

Here’s how retirement plan tax breaks may widen racial wealth gaps

  • Tax breaks for retirement plans, such as 401(k) plans and individual retirement accounts, reward workers for saving more money.
  • But these write-offs tend to benefit those who “already have savings” and are “overwhelmingly white,” policy experts say.  
  • These perks may be widening the racial wealth gap, according to a Tax Policy Center analysis.

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Tax breaks for retirement plans, such as 401(k) plans and individual retirement accounts, may reward workers for saving more money, but these write-offs may also be widening the racial wealth gap.

That's according to a new analysis from the Tax Policy Center that is based on the Federal Reserve's latest Survey on Consumer Finances.  

In 2019, white families had a median retirement balance of $80,000, not including pensions. However, the median amounts for Black and Hispanic families were $35,000 and $31,000, respectively.

Moreover, white families were most likely to have retirement assets, with 57% having accounts, whereas only 35% of Black families and 26% of Hispanic families had retirement plans, the survey reported

"I think the problem is that our retirement tax system is broken," said Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center. "It rewards those who already have savings.

"And unfortunately, the racial and ethnic makeup of those who have savings is overwhelmingly white."

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For decades, policymakers have made it easier for affluent retirement account holders to accumulate more wealth, Rosenthal said. 

For example, Congress lifted income caps for traditional to Roth IRA conversions in 2006, paving the way for so-called "backdoor Roth IRA contributions," which allow investors to sidestep contribution limits, according to a report Rosenthal filed with the Senate Finance Committee in August. 

"It just allows rich guys who have a lot of savings to transfer money from a taxable to a tax-exempt account," he said. 

If you don't have savings and you don't have a lot of income, it's hard to participate in some of these retirement savings rewards.Steven RosenthalSenior fellow at the Urban-Brookings Tax Policy Center

This policy, among others, have led to the growth of so-called "mega-IRAs," accounts with balances of $5 million or more, Rosenthal said.

In 2019, there were more than 28,000 taxpayers with mega-IRAs, according to analysis from the Joint Committee on Taxation. 

However, many workers lack the resources to leverage these tax breaks, Rosenthal said.

"If you don't have savings and you don't have a lot of income, it's hard to participate in some of these retirement savings rewards," he said.

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