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A friend shared an interesting idea from David Bach’s “IRA Flat Tax” proposal, and it got me to thinking.
Here is the white paper if you haven’t read it:
IRA Flat Tax White Paper – David Bach.pdf – Google Drive
The basic idea is simple: for a limited window, maybe 2026–2033, retirees could voluntarily withdraw money from traditional IRAs, 401(k)s, and similar retirement accounts at a flat federal tax rate — possibly around 12%.
The goal would be to make it easier for retirees to use the money they spent decades saving, instead of letting fear of taxes, RMDs, and complicated tax planning keep that money locked up until later in life.
On paper, I can see the argument.
Many retirees did the right thing. They worked, saved, invested, delayed gratification, and built retirement accounts. But once they retire, some are afraid to touch the money because every withdrawal feels like a tax event, an IRMAA risk, or a planning mistake.
A temporary flat-tax window might encourage people to spend, gift, convert, repair homes, help family, travel, or simply enjoy more of what they earned while they are still healthy enough to use it.
But there are fair questions too.
Would this mostly benefit people with larger retirement accounts? Would it pull too much future tax revenue forward? Would it complicate Social Security taxation, Medicare premiums, and long-term tax planning? And would Congress ever create something this simple without adding layers of rules?
My Practical Take:
Retirement accounts were built to support retirement — not just to become a tax puzzle for retirees and heirs. A simple, temporary tax window could be a useful idea, but the details would matter greatly.
Would you support a temporary flat tax on traditional IRA and 401(k) withdrawals?
And if the rate were 12%, would it change how you handled withdrawals, Roth conversions, gifting, or spending in retirement?
Go for it, certainly would make it easier in my mind. Great article keep us thinking. It sure would make things less complicated, but then again it would affect IRMMA and other things. I would vote for it.
I support this, although I’m not sure 12% is the right number. I think it is highly useful and desirable for the government, too. Personally, I would probably take advantage of this action even if the rate was in the 12-15% range, since it is much lower than my marginal rate for my RMDs, and I’d still have enough years left to recoup much of the negative impact of an earlier tax payment.
I support a related move even more strongly – let whatever withdrawal tax rate is adopted facilitate conversion to a Roth. The main benefit from that for the government is that it will generate much more tax revenue for the government in the near term as retirees pay present taxes to avoid future ones. It works like any sales promotion – a short term discount will encourage “stocking up” on the offer.
Why for a limited time? Make it permanent.
It is an interesting proposal. However, if I were a member of Congress, I wouldn’t feel a compelling need to do this. By law, the money is going to come out anyway, and often at higher tax rates.