Good Article on Roth IRA Taxes

[am_vanquish]

I know we've discussed the possibility of future taxes on Roth IRAs a few times on this board ... so I thought I'd share this article:

Is a Roth IRA Safe from Taxes?

Personally, I'm saving every penny I can in my Roth IRA and Roth 401(k). Future income tax rates in this country are going to be outrageous if we continue our spending spree on entitlement programs. Whether or not I can trust Congress to keep their hands out of my cookie jar is another matter ...

[jIM_Ohio]

According to experts, the upshot is that if you think your personal tax rate will be higher in the future than it is now—or perhaps even the same—converting a regular IRA to a Roth account can make sense.

Roth accounts have other signal benefits as well: Unlike with regular IRAs, there aren't mandatory distributions for the owner, and Roth income doesn't help to raise Medicare premiums or taxes on Social Security. Roth withdrawals also aren't subject to the new 3.8% Medicare tax on investment income earned by the wealthy that will take effect in 2013, and they don't raise the likelihood that other income will be subject to the new tax.

more-indirect ways lawmakers could erode the benefits of a Roth conversion at some future date—especially for very wealthy taxpayers who seem (to them) to be taking advantage of the system. They could try to tinker with income definitions for Medicare or Social Security, or perhaps require distributions for Roth owners. They might even tax an account's earnings if either the earnings or the account is above a certain threshold—although these would be such big changes in retirement policy that they don't seem likely,

What about a value-added tax, unlikely as one may be? A VAT is similar to a sales tax, so it would probably affect both regular and Roth accounts the way state sales taxes affect IRA withdrawals now—as a separate levy.

The bottom line: Roth benefits can be real, while cutbacks mightn't come for years if at all; meanwhile, tax rates are rising for those at the top. Wary taxpayers who stand to benefit from a conversion but don't want to be vulnerable to changes might want to do a series of partial conversions instead of one large one. These are allowed, and advisers often recommend them as a way of avoiding bracket leap on a conversion.

My take on all the above:

1) The US will have tax brackets. We have them now, and we will have them in the future too
2) The bracket caps (ranges) change every year. They have since I started knowing about them, and I expect them to change a little every year.
3) About every 5-10 years the percentages of the brackets changes. Right now those brackets are 10%-15%-25%-28%-33% and 35%. I believe some of the health care legislation changed that top bracket to 39.3%.

I have done some reading, and believe many people believe a tax cut to the 25% bracket is in order- the jump from 15% to 25% is a 60% increase in bracket tax... no other jump from one bracket to the next is so high.

It is this readers opinion if you pay taxes in 25% bracket now, you are best off taking the deduction now... any increase in the percentage to the 25% bracket will be seen as a steep tax on the middle class (its already 60% higher than the bracket below it, anything more would be government robbery IMO).

If you are in 15% bracket, that is about as low as taxes can ever get, so use the Roth at this point because taxes cannot really get any lower (around 40-60% of people in 15% bracket pay no taxes anyways).

[jpg7n16]

I think the point of the article was, "well what if Congress comes up with a way to tax the withdrawals anyways?"

So if you're in the 15% bracket now - and you pay the tax (at one of the lowest rates ever), and then Congress decides to tax you again (what the article was saying) - then you'd get taxed twice on the same money, and would have been better off in a traditional/401k.


I think what the article claims will never happen. Or they'll grandfather all Roth IRA's funded before 20XX to be exempt from the withdrawal tax. Politicians like their jobs too much - and anyone who votes for that is getting a swift boot out of office.

[jIM_Ohio]

any change which happens we will see coming. If I see that my Roths get taxed in 2012 and beyond, in 2011 I can convert them to traditional IRAs or withdraw my contributions.

if sales taxes increase, Roth loses- that is same now or in future.
Roth IRAs already trigger SS to get taxed now (if married filing jointly and income is higher than 44k, I believe the Roth is getting taxed indirectly already by causing 50% of SS benefit to be taxed.