Roth IRA long term political risk

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Eferv
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Joined: Tue Aug 16, 2011 3:53 pm

Roth IRA long term political risk

Post by Eferv »

Hi,

I don't follow politics too closely so maybe someone better informed could lend an opinion:

What are the chances of the US changing the Roth IRA policy in the future, such that

1) taxes will be assessed on all withdrawals just like an IRA, but perhaps at a lower rate, and
2) This new policy will affect current Roth IRA accounts.

Thanks
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archbish99
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Joined: Fri Jun 10, 2011 6:02 pm

Post by archbish99 »

That would be predicting the future, which everyone around here knows is impossible.

My guess is that anything new would probably freeze contributions to existing accounts and have some provision for a rollover to whatever the new thing is. (i.e. roll-over your Roth to a super-duper-new-taxable-thing, get a tax credit.) Politically, I suspect the direction we'll wind up going is fewer deductions and credits, but lower marginal rates. Whether a Roth is worthwhile for any given person depends heavily on their current tax situation and their (unknown) future tax situation.

If you look, for example, at the Boyles-Simpson committee recommendation, they suggested rolling 403b, 401ks, IRAs, etc. together into a single type of tax-advantaged account, with a max contribution of the lesser of $20,000 or 20% of income.

I'm a big proponent of putting some money in both Roth and Traditional accounts for this reason -- it gives me tax diversification decades from now when I need to take distributions.
DSInvestor
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Post by DSInvestor »

When I was working and making Roth IRA contributions, I didn't worry about these questions. My plan was to max out tax advantaged accounts Traditional 401k, Roth IRA and also invest in taxable accounts. In the context of my plan, Roth IRA is an alternative to divert 5K that would have otherwise been added to a taxable account. If comparing 5K to Roth IRA to 5K to taxable account, Roth IRA wins. This made Roth IRA contributions a no-brainer for me. Having assets in Traditional, Roth and taxable accounts gives me tax diversification.

Roth IRA conversions are a different issue entirely. IMO, the only no-brainer here is if you can convert for little or no tax. Folks who go back to school may have a dip in income which may allow tax free Roth conversions. Folks who are retired with assets in taxable accounts but no pension or social security benefits may also be able to do a series of smaller tax free Roth conversions.

Folks who have the Roth option in their employer plans may be interested to read TFB's The Case Against Roth 401(k):
http://thefinancebuff.com/case-against-roth-401k.html
allancoleman
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Location: Alaska & Hawaii

Post by allancoleman »

For myself , I'll continue to do a regular annual Roth conversion in my taxfree forever Vanguard Flagship Roth account like I've done every year since they were first allowed years ago because every single tax calendar year that a investor misses the opportunity to do a Roth conversion is gone forever . :!:
Wagnerjb
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Location: Houston, Texas

Post by Wagnerjb »

I believe that we will see Roth IRA withdrawals taxed in the future, but only for the wealthy. Not for the ordinary individual. For the wealthy, the taxation will be very indirect, similar to the convoluted AMT tax today.

We have precedents for this taxation. Previously, social security wasn't taxable, and up to 85% is taxable for the wealthy today. Previously, Muni bond interest wasn't taxable, but today the wealthy (who pay AMT) pay tax on a portion of the Muni bond interest.

The likelihood of Roth taxation in the future would suggest that those in the upper income class consider NOT converting to a Roth unless they can convert at a tax rate that is clearly favorable (compared to the rate they expect in retirement). If it was a toss-up - meaning today's tax rate is what the individual expected in retirement - I would NOT convert due to the future taxation risk.

Best wishes.
Andy
Alan S.
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Post by Alan S. »

I don't think there is much danger because the Roth model includes paying taxes up front and conversions generate large tax revenues which are voluntary decisions by the TIRA owner.

The special 2010 conversion options were designed to encourage conversions to generate tax revenue. The legislation of last Sept to allow conversions within qualified plans was more of the same. We all know the govt is starved for tax revenue, and if Congress starts to mess with the Roth model it will result in less current tax revenue. There is also a point at which restrictions become very blatant after encouraging taxpayers to contribute or convert to a Roth. Bait and switch or reneging would probably be an understatement of what people would consider most restrictions.

Perhaps the largest relative threat to Roth IRAs would be a VAT because it VAT would eliminate the income tax increases on the horizon and therefore de value Roth accounts vrs pre tax retirement accounts.

In a worse case scenario, I agree with the concept of freezing existing Roths and limiting new contributions rather than changing the tax laws for current balances. There has been many precedents for this type of change, ie what you already committed to or earned is protected, but the water is turned off after a certain date.

I would basically continue to generate tax diversified retirement fund balances which provides a hedge no matter how things develop.
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FNK
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Post by FNK »

Another possibility is some kind of a national sales tax or value added tax. If it is combined with lower or no income tax (e.g. FairTax), Trad will get undertaxed and Roth will be double-taxed. I expect this will be adjusted for. E.g., maintaining the tax rate on Trad withdrawals.

Anyhow, diversify. I am.
Leesbro63
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Post by Leesbro63 »

Wagnerjb wrote:I believe that we will see Roth IRA withdrawals taxed in the future, but only for the wealthy. Not for the ordinary individual. For the wealthy, the taxation will be very indirect, similar to the convoluted AMT tax today.
But can't the wealthy, who probably have other income, just NOT do withdrawals? That is one of the benefits of a ROTH...no RMDs.
Wagnerjb
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Post by Wagnerjb »

Leesbro63 wrote:
Wagnerjb wrote:I believe that we will see Roth IRA withdrawals taxed in the future, but only for the wealthy. Not for the ordinary individual. For the wealthy, the taxation will be very indirect, similar to the convoluted AMT tax today.
But can't the wealthy, who probably have other income, just NOT do withdrawals? That is one of the benefits of a ROTH...no RMDs.
I suppose so. Another scenario is that Congress debates the taxation of Roth accounts, and the wealthy get wind of the potential change...and simply withdraw 100% of the Roth money (tax free) immediately.

Best wishes.
Andy
xerty24
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Post by xerty24 »

Wagnerjs wrote:...the wealthy get wind of the potential change...and simply withdraw 100% of the Roth money (tax free) immediately.
the under 59 crowd can still get their Roth earnings nabbed this way since they cant withdraw their earnings tax-free.
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