Free Ebook.

Enter your email address:

Delivered by FeedBurner

« What to Do with 529 Money If Your Child Gets a Scholarship | Main | One Year Ago This Week -- June 22 »

June 22, 2007


Feed You can follow this conversation by subscribing to the comment feed for this post.

That is a poitn I have heard a lot from propoents of traditional IRAs.

1) That is the point of a balance of retirement money in pretax and post tax accounts. The former insures againts this issue, the latter insures agaisnt tax increases.

2) If congress decided today that ROTH accounts would no longer recieve that tax advantage beginning Jan 1, 2008(and I personnally doubt they ever will)... all you have to do is do a ROTH to traditional conversion and deduct the ammount from your taxes this year.

3) If congress did act against ROTH IRAs, it would be to simply ban further contributions. They could also enact a flat sales tax. So, Traditional IRAs would have the advatage of never having been taxed until the point of purchasing somethin and ROTH IRAs would be taxed twice. Once at the time of income and once at the sales point. If this happens, I defer to #2 for how I would handle it.

Bottom line - stay tax diversified to hedge your bets

I also find it implausible that Congress would hit Roths anytime soon. There are a few problems with that assumption, all of which hinge on the fact that conventional IRAs are a more tempting target:

1. There isn't that much in Roths compared to conventionals. (I don't have a source for this now; I did see official figures a while ago.)

2. Roths are already taxed, making it politically difficult to add a full tax onto them; conventionals are untaxed, and everyone who has one knows that taxes WILL be due.

3. The money from taxing Roths would have to come in the future; even Congress couldn't get away with imposing an immediate tax. The money from taxing conventionals could possibly come _now_.

Let me explain the last point. Congress could _require_ all conventional IRAs to be converted to Roths, with income tax in the full amount due immediately. The result would be a huge immediate influx of money (for them) and no big future loss for the investors (it nets out about the same) -- hence only a minor political trouble.

See what I mean?


There is NO CONVERSION FROM A ROTH to a traditional IRA.

If conventional IRAs had to be converted to Roth IRAs, it would NOT net out the same. The increase in taxable income during the year of conversion likely would push you into a higher tax bracket that year. On the other hand, if you pull out the traditional IRA in retirement, when you have no other income, the first few dollars are not taxed until you exceed the amount of your standard deduction and personal exemption ($9800 for someone over 65). Paying tax right away at a higher marginal rate Vs paying no tax later -- doesn't seem to me like it nets out the same.

My professional opinion is that ROTHS will probably not be tax-free when I retire in 40+ years. BUT I assume most likely some of what was said above - Congress will probably disallow further contributions to ROTHS or something. It is even likely they will say earnings after a certain point will be taxed. But generally Congress does not make retroactive tax laws. So some things to think about. I actually read a wonderful article on how Congress has and could retroactively changes thing like ROTH IRAs so it is possible and I remain wary. I read it online and can no longer find it, unfortunately.

I do the same as far as strategy. I don't have a 401k but I have an employer-funded plan that will be taxed when I withdraw. So I put all my retirement contributions in ROTHs and mostly for the forseeable future each (employer plan an ROTH) is 1/2 & 1/2. I wouldn't put all my eggs in one basket, but I wouldn't avoid ROTHs entirely because it is quite feasible ROTHs will still be as stands in retirement and I wouldn't want to miss that boat. Just not exactly holding my breath.

It just amazes me that folks are willing to play hypothetical and guess with all of these scenarios with the Roth. Could "Congress" change the laws and tax the Roth in 2054? I guess so, if we elect fools. It seems we all know we have a good thing going with the Roth and we wont to spoil the pot of gold at the end of the rainbow. There seems to be this push from blogs as of late to suggest that Roth's aren't safe. I don't understand what this theory is founded in.

And IF it happens, talk about killing Generation X and Y. We wont have squat from Social Security and now folks placing funds in tax-free savings accounts will be taxed at withdrawal, destroying millions of folks doing the right thing? There comes a point where it gets foolish and silly to think about what could happen DECADES from now.

Sometimes in life you prepare to your fullest, do EVERYTHING your supposed to and things go wrong. But for the horizon for things to 'go wrong' to be 40-years out and be making guesses that the Roth will be dead is something that should be left for when the plan changes, not now. I don't see what talking about this now, when there is nothing I have read that breaks it down, does for a savvy saver making proper decisions. I am in my late 20's and I can tell you right now, the majority in my age group can't even fathom being in their 60's and aren't saving like they should because its just to far away.

If some poor sap does the right thing, makes great choices with HIS money and maxes out his Roth IRA and retires at 65-years old with $3 million and Uncle Sam decides they want to take a piece of it after that account being tax-free for 45-years, there is absolutely nothing that individual could have done, besides not elect idiots that would take his money away. Put yourself in that person's shoes....Your country would have basically turned their back on you...What the heck can you do? Maybe cash out and move to another country.

Luke: if your claim is that Roth money is safe as long as idiots don't get elected to congress, that argues for going ALL traditional. Idiocy abounds in the federal government. I don't say this to beat up on any particular party...both have their share of idiots and idiotic ideas. And even when the individuals aren't idiots, the system tends to produce idiotic results.

Matt...Good point, but my overall point is that there is no point to discussing 'what-if's' 40-years from now. If the Roth could change, so could everything. Maybe Canada attacks us and they enslave us.

If there were stats or inside knowledge of what would happen that would turn a tax-free investment into a tax-machine for the government, I am all ears, but to continue to hear that the Roth is in trouble is just a hunch.

And we the folks do elect congress and if 40-years from now, they are taxing withdrawals on the Roth IRA, who do we have to blame?

If were are hypothesizing about ONE silly Roth IRA and saying how drastic things could be, there are 100's of more things the Federal government could do that would have a far greater impact than changing the Roth IRA in 40-years...

It's like worrying about your great, great grand children before you even have kids yourself.

Luke: fair enough. You make a good point as well, and I understand it better in your follow-up post. I was mostly just trying to be a smart-ass anyway :)

You're right that for people with a long enough time horizon, it is pointless to argue whether Roth or Traditional tax treatment is better 40 years from now. Given that no one can predict the future, I think the best strategy (as other commenters have stated) is to diversify into both.

My company just started offering a Roth 403(b) option, and I plan to go with a 50/50 split.

The comments to this entry are closed.

Start a Blog


  • Any information shared on Free Money Finance does not constitute financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. All posts are © 2005-2012, Free Money Finance.