New Retirement Medical Account Proposal Would Create Lucrative Tax Shelter And Swell Deficits, But Do Little To Help Low- And Moderate-Income Seniors

Publication Date: July 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Robert Greenstein; Edwin Park

Research Area: Health

Keywords: Economic projections; Health care costs; Health insurance; Senior citizen

Type: Report

Abstract:

In a major health policy address on July 12, Senate Majority Leader Bill Frist promoted a proposal to create new, tax-advantaged “Lifetime Health IRAs.” Also known as Retirement Medical Benefit Accounts (RMBAs), these accounts are intended to encourage financial security for retirees by helping them pay for long-term care costs and other health care expenses. This proposal was originally designed by Fidelity Investments and first surfaced during negotiations in the fall of 2003 over the Medicare prescription drug legislation.

The RMBA proposal would alter existing tax-favored retirement savings accounts, such as traditional Individual Retirement Accounts (IRAs) and 401(k) plans, by allowing individuals to establish special RMBA “subaccounts” within IRAs and 401(k)s. Individuals who contributed to IRAs or 401(k)s could place a designated percentage or dollar amount of their deductible contributions in these RMBA subaccounts and receive an extremely lucrative tax break for those funds.

Under current law, contributions to traditional IRAs and 401(k)s are tax deductible and earnings on these accounts accrue tax-free. When account-holders withdraw funds from IRAs and 401(k)s after they retire, the withdrawals are taxed as ordinary income. By contrast, under the RMBA proposal, all funds withdrawn after retirement from the RMBA subaccounts would be tax free as long as they are used to pay for out-of-pocket health and long-term care costs.