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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.
Just got back from Australia and this is exactly how they do it. Upon retirement the funds in your tax deferred account are taxed at 12% and you are required to withdraw a minimum of 4% every year but never required to pay tax on that money again.At least that is what our friend who worked for the State government in SA shared with us. So much simpler!!
I’d love that if I could flip the money to a Roth.
What about state and local income tax? How would that work?
This seems like a great idea for those of us that find ourselves in a position in which our retirement income is higher than anticipated (poor planning?). Having better, cheaper access to that money could make those seniors lives easier. David Bach has a good idea but I do not think there is likely to be support where it matters, in Congress, as it is a tax cut.
Reinstitute one time, 10 year forward averaging of a lump sum distribution.
That was possible in the past, after separation, but effectively eliminated for anyone born after 1935 by changes that were part of the Tax Reform Act of 1986.
The process was “simple”. You must take all taxable monies from the account (this was pre-Roth, but we did have after-tax 401(a) monies), divide taxable amount by ten, calculate the tax using the single filer rate, then multiply the calculated tax by 10.
Those with substantial account balances still end up with higher marginal rates, and higher average/effective tax rates.
Current 2026 single filer federal tax rates:
Tax Rate Taxable Income Bracket
10% $0 to $12,400
12% $12,401 to $50,400
22% $50,401 to $105,700
24% $105,701 to $201,775
32% $201,776 to $256,225
35% $256,226 to $640,600
37% Over $640,600
So, someone with retirement assets of $124,000 would pay $12,400 in income taxes.
Someone with $1,000,000, would pay ~$167,118.
Someone with $10,000,000, would pay ~$3,261,792
I would require all taxable monies be rolled over to a single IRA.
And, I would treat it much the same as a Roth conversion (but not apply the 5 year rule when/once the individual reaches age 59 1/2). I would give individuals the option of using their assets to pay the tax (waiving the 10% penalty tax) or access plan loans equal to the federal and state withholding taxes, per the rules for qualified plans under 72(p), without the $50,000 limit, giving the individual the choice of a 5 year (general) or 15 year (home purchase) repayment period.
As Dick suggested earlier, all revenue would go toward retiring national debt.
Seems like a pipe dream to me. As being fortunate, I do not mind paying my fair share, but that is really hard to define. Something tells me that soon someday, we will have to pay off the debt, that can is really getting smashed up. This could catch on and be good for me, but not for the overall middle class I do not think so, cannot imagine all the consequences.
Mandatory withdrawals are a problem. Let’s say you have $350k in standard investment and bank accounts. Why should you have to withdraw anything from the $800k in retirement accounts? Just let it grow.
Michael, taxable distributions today, are because of the deal we made with the devil years ago. The devil said “I’ll give you a pass on tax now, but you have to start paying it back when you’re 73 (or 70.5 or 75).
I’m thinking of the old V-8 juice commercials; slapping myself on the forehead, saying “wow, I could have had a Roth”.
Great article! Of course this would mostly benefit people with larger retirement accounts! It would be a streatch to believe Congress would ever create something this simple without adding layers of rules! I would absolutely and support a temporary flat tax on traditional IRA and 401(k) withdrawals? At a 12% rate this absolutely cause me to raise to raise my withdrawals and my gifting.
Bach said that if they do this he would withdraw his entire IRA immediately and pay the 12% rate. Intriguing idea.
Yes – right into a Roth
To be a true 12% flat tax, the proposal would need to mitigate the ‘tax torpedo’ which triggers downstream increased taxes (i.e., bypass AGI/MAGI so it wouldn’t impact the SS amount taxed, IRMAA adjustments, senior bonus, capital gains, etc) or push you into a higher tax bracket.
The proposal is worth discussing. For example, there could be two flat tax rates (12% and X% tax) based on income thresholds.
This is not a good idea as it would disproportionally benefit wealthy people who do not need help. I wish the government would create a fair tax system and leave it alone, so we can depend on it and not have to dance around arcane rules that are constantly changing. Myself, I don’t mind paying my fair share so we can have a country where everyone gets a fair shake.
absolutely
Definitely food for thought. IRA withdrawal strategy seems complicated, especially for less knowledgeable retirees. I appreciate all I glean from those posting here, especially from different perspectives and experiences.
While some say this is abad idea for various reasons, mostly related to the budget deficit, I think it’s more nuanced than that. If people pull money out and spend it, it could create increased economic activity which could create an economic boom and in turn raise more revenue. I’m not saying it’s a slam dunk, it’s just that when you pull one lever, there are intended and unintended impacts. No one answer is correct.
There are some people in Washington who believe increased economic activity and growth is the answer to saving Social Security. Not going to happen.
Unintended consequences like inflation.
Unintended consequences like encouraging a stock market selloff.
The comments here are encouraging when you compare what is posted on social media which is essentially – why should we pay taxes, but give us more, including free healthcare.
That 7-year window would have adverse effects on federal revenue that investors have known about all along. Doesn’t seem appropriate to change such laws that only benefit some rather than all.
Like many favorable tax policies, good or bade, such as lowered tax rates, it would probably keep getting extended by politicians effectively buying votes.
I agree with the two guys below.
We should not be supporting anything that lowers federal revenue as long as we are adding trillions to the national debt. We are currently creating a crisis level burden for our children and grandchildren.
This reminds of the plethora of social media posts saying SS should be increased instead of Congress giving itself a raise- which hasn’t occurred since 2009 and of course, one has nothing to do with the other.
Agree, Dick. I would add a couple thoughts. Temporarily there would be a surge in federal revenue as folks took advantage of this. I would make sure that the new revenue HAD to be ear marked for deficit reductuion only ( or perhaps shoring up trust funds for Soc Sec/Medicare). Without doing this congress will just spend the new revenue like they always do.
As to the bigger picture, let’s face it, this country needs more revenue. I’ve said to friends that I would be willing to pay more in taxes IF we had some sort of balanced budget mechanism to control spending. Without that, I refuse to pay more in taxes as study after study shows congress has a propensity to spend something like $1.35 for every new dollar they collect.
I agree with this sentiment, but with a quibble. We need to stop blaming Congress alone for spending as they always do and hold the executive branch accountable too.
Not good policy with a $1.9 trillion federal budget deficit.
Unless we somehow start to reign in federal spending.
I will gladly help pay down that debt by doing Roth conversions at 12%.