Roth IRA's and possible future change in tax laws...

[Oddibe McDowell]

I remember reading a thread on this forum or on Morningstar a few months ago about the possibility of Congress changing the tax laws down the road and taxing prior Roth contributions. I believe it came up in the context of a traditional versus Roth 401(k) discussion. Frankly, I was shocked at how many people on the forum thought this was a real possibility.

I have the option of using a Roth 401(k) or a traditional 401(k) at my job. I was strongly considering the Roth given my age (28) and tax bracket, but the possibility of a change in the tax laws has me thinking.

How do most of you feel about this? How real of a concern is it? And if the laws are in fact changed down the road - how do you think they would go about taxing money that has already been taxed once?

I would think with the amount of people converting in 2010 - there will be enough money in Roth accounts that there would be a genuine uproar if Congress didn't keep its word. But reading the Social Security / Medicare threads ... it seems like we're all in agreement SOMEBODY will have to pay for this stuff down the road.

Here's to hoping it's not the ones who actually tried to save money for retirement. I'd appreciate your thoughts.

[mptfan]

In my opinion, it is usually advisable to invest in tax deferred accounts before investing in a Roth, but I will put that issue aside and assume you are not asking about that.

Of course nobody knows whether Congress will make Roth IRA withdrawals taxable in the future, but I think there is a real possibility of that happening.

You asked how would they tax money twice. Are you kidding? Where is it written that the government can only tax money once? Let me cite just a few examples.... you earn money and it is taxed (once), then you buy stuff, and the government charges you sales tax (twice), or, you pay your cell phone bill and you pay various FCC taxes (twice), or you buy property and they charge document stamps (twice). Also consider that when a corporation earns a profit, it pays taxes, and then, when the profit is distributed to you in the form of a dividend, you pay tax on the same profit...again. Also consider that you pay tax on earnings in the form of social security taxes, then, when you collect social security, you pay taxes on the social security benefits! I could go on, but you get the point, there is no such law anywhere that says the government can't tax you twice or three times on the same money.

P.S. Do you recall the main theme of President Bush's campaign in 1988? (Hint: it was "No new taxes!") Guess what he did after getting in office? He raised taxes. The point is... promises made can be promises broken.

[Cubsfan]

Do you recall the main theme of President Bush's campaign in 1988? (Hint: it was "No new taxes!") Guess what he did after getting in office? He raised taxes. The point is... promises made can be promises broken.

Bush: "Read my lips! No new taxes!"
Gallagher: "Does no good to read his lips when he's talking out his a**"

Sometimes it takes a comedian to see things clearly.

[hans37]

You might not like my answer.

I intend to watch Congress: as soon as this proposal is up for a vote I liquidate all ROTH account funds.
Remember if the account is over 5yrs old no penalty.

If they try to get slick and back date the taxes, WHOOSH the funds go to offshore tax haven.

If they want to chase it around fine, their decision will create a huge demand for asset protection services.

Likely they will be forced to give up targeting the deer in the headlights crowd.

[Rick]

Changes to Roth Tax treatment is unlikely. When congress finally gets the nerve to deal with social security...that will take all the energy-there will be no serious move to tax Roth IRA's.

I hope.

Rick

[Mel Lindauer]

And if the laws are in fact changed down the road - how do you think they would go about taxing money that has already been taxed once?

Hi Oddibe:

It's really rather simple; they merely institute a national sales or value-added tax to replace or supplement the present income tax. In that way, there's no difference between Roth and TIRA money; when you spend money from either source, you pay the national sales or value-added tax.

Regards,

Mel

[alvinsch]

Here's the link to one of the other threads on this, where I gave my two cents that I don't believe I will ever be taxed on my ROTH. I also don't believe the income tax system will ever be replaced with a national sales tax or other VATs, though I believe they will likely try to add it to the current income tax system to increase revenue. So I don't see it changing the relationship between deductible and ROTH IRA's.

Conversation 1833 link

- Al

[Wagnerjb]

You might not like my answer.

I intend to watch Congress: as soon as this proposal is up for a vote I liquidate all ROTH account funds.
Remember if the account is over 5yrs old no penalty.

If they try to get slick and back date the taxes, WHOOSH the funds go to offshore tax haven.

If they want to chase it around fine, their decision will create a huge demand for asset protection services.

Likely they will be forced to give up targeting the deer in the headlights crowd.

I am one who firmly believes that Congress will - indirectly - tax withdrawals from Roth accounts, although only for those with higher incomes. They might look at the total income - including taxable, muni bond income and Roth distributions - and impose some sort of disguised tax on those with higher "total income" amounts. Maybe they phase out some deduction that we would otherwise get.

We have seen this happen in the past, so there is plenty of evidence it can happen again.

I was discussing this over lunch recently with a buddy, and he mentioned the idea that Hans had. He said, "the minute they impose a tax on Roth accounts, the smart people will withdraw the entire amount - at zero tax - and never be subject to the new tax". But that cuts your nose off to spite your face. You forfeit all future tax deferral benefits of a Roth account, just to save maybe 3% in extra taxes. For some people, the tax cost may be worth incurring in order to keep the Roth intact for continuing tax benefits.

The low income folks wouldn't worry, but the higher income folks would have to make a decision after analyzing their individual situation.

Best wishes.

[hans37]

You might not like my answer.

I intend to watch Congress: as soon as this proposal is up for a vote I liquidate all ROTH account funds.
Remember if the account is over 5yrs old no penalty.

If they try to get slick and back date the taxes, WHOOSH the funds go to offshore tax haven.

If they want to chase it around fine, their decision will create a huge demand for asset protection services.

Likely they will be forced to give up targeting the deer in the headlights crowd.

I am one who firmly believes that Congress will - indirectly - tax withdrawals from Roth accounts, although only for those with higher incomes. They might look at the total income - including taxable, muni bond income and Roth distributions - and impose some sort of disguised tax on those with higher "total income" amounts. Maybe they phase out some deduction that we would otherwise get.

We have seen this happen in the past, so there is plenty of evidence it can happen again.

I was discussing this over lunch recently with a buddy, and he mentioned the idea that Hans had. He said, "the minute they impose a tax on Roth accounts, the smart people will withdraw the entire amount - at zero tax - and never be subject to the new tax". But that cuts your nose off to spite your face. You forfeit all future tax deferral benefits of a Roth account, just to save maybe 3% in extra taxes. For some people, the tax cost may be worth incurring in order to keep the Roth intact for continuing tax benefits.

The low income folks wouldn't worry, but the higher income folks would have to make a decision after analyzing their individual situation.

Best wishes.

umm nope no forefit of tax deferral in a tax haven but management expenses could make that moot.

Just unwilling to roll over and play dead whilst being mugged.