Commentary -- the labyrinth of tax-advantaged plan rules

This worksheet concludes with this brief commentary. VeriPlan has endeavored to model the important aspects of current tax laws related to tax-advantaged employer plan and personal account contributions and deductions. Building tax-advantaged plan functionality into VeriPlan's automated lifecycle projection model in a manner that could be useful to most U.S. citizens was an extraordinarily challenge. Convoluted U.S. tax-advantaged plan laws are the root cause of this difficulty. If our government expects its citizens to act responsibly, to plan rationally, and to provide for an increasing portion of their own future financial welfare in retirement, then it ought to provide its citizens with a straightforward and understandable set of tax incentives for retirement savings and investing.

For example, anyone would pity the seventy-year old senior citizen: a) whose spouse is covered by a retirement plan at work, b) who personally has earned income and has elected to receive Social Security payments, and c) who wants to decide whether to contribute to an IRA. To calculate how much, if any, of his contribution would be deductible, he would have to understand and navigate a complicated seven page worksheet including examples in Appendix B of Publication 590. Of course, he would have already needed to figure out that he could not contribute to a 'traditional' IRA, if he had reached the age of 70 and 1/2 by the end of the calendar tax year. Oops, his birthday was June 17, so he could not contribute. Then, if he persisted, he might figure out that he could contribute to a Roth IRA beyond that age. With further reading he would find that he would certainly not be able to deduct his contribution. He also might figure out that he might not be able to make any contribution at all, if he and his wife's 'modified adjusted gross income' was too high.

Yes, these senior citizens both are working! Many older people are very productive, enjoy what they do, and want to stay in the workforce at least part-time. This situation represents the type of behavior that should be encouraged, when one considers that the U.S. Social Security and Medicare systems are not viable over the long-term. Increasingly, older persons may chose to or need to work rather than retire. Whether the government should offer additional incentives is one question. But, certainly the incentives that it already offers should be understandable to ordinary intelligent citizens.

If you review VeriPlan's IRA rules chart in Section 4 of VeriPlan's yellow-tabbed "12-Your Tax-Advantaged Plans" worksheet, it should be clear that any person of any age could easily be befuddled by these complex rules. As they must, IRS publications clarify in great detail the many nuances of the tax laws. Unfortunately, they fail to provide sufficient overview information to summarize the big picture. Nowhere in Publication 590 will you find a chart of general tax rules about traditional IRAs and Roth IRAs like the one in Section 4.

The unnecessary complexity of rules regarding tax-deferral and retirement planning that taxpayers have to navigate are not confined to this publication. Publication 590 makes reference to IRS Publication 560, "Retirement Plans for Small Business" and to three others, and Publication 590 points to a long list of other forms and forms instructions. Furthermore, there is a very large amount of additional material on the IRS website. Our excessively complex tax structure is simply a counterproductive national embarrassment, and our citizens deserve better.