Over the past week or so I've been hearing rumblings from various talking heads that the government should consider, or has considered, changing the rules when it comes to the Roth IRA and their tax free withdrawals at retirement. In some scenarios some people would just like to do away with the accounts altogether. The reasoning? They allow for too much tax revenue to be lost, and with government entitlements growing every day, they're going to need more tax revenue.
While even a year or two ago I would have dismissed this type of thinking as it would represent a significant betrayal of savers and investors, the more I see our government spending, the more I'm inclined to not rule out the idea that the Roth IRAs as we know them may not always be around. They're just too tempting of a target for our politicians and their big spending ways.
So what are some of the ways that people are predicting that Roth IRAs could change in the future?
Roth IRA Become Taxable At Retirement For Some?
One of the ways that folks are suggesting that Roth IRAs could change in the future is that politicians could institute a tax of some sort on taxpayers over a certain income threshold, or those with what one writer in the New York Times calls an “excessive balance”.
So in one scenario, say you make over $250,000, you'd be taxed 5% on your Roth withdrawals. Or they could do something like charging tax on earnings through a capital gains tax of some sort. The possibilities are endless.
At the most extreme end, the federal government might try to tax the earnings on a Roth after all, say through the capital gains tax, which is currently at 15 percent for long-term gains but could go up in the next few years. Or it might levy some sort of an excise tax on excessive balances, however those might be defined.
Roths are especially useful for estate planning purposes. Regular I.R.A. holders have to start taking money out once they reach the age of 70 and a half, but Roth owners don’t have to take money out during their lifetimes. Heirs of Roth holders, meanwhile, pay no income taxes when they cash out of the inherited account and can spread those distributions over an entire lifetime, allowing for decades more of tax-free growth thanks to the wonders of compound interest. Some part of this could certainly change.
So the author seems to thinks that some of the other benefits of a Roth IRA, including no required minimum distributions and inheritance provisions, could be phased out – or changed to include some sort of tax.
Forced Withdrawals From Roth IRA
Some say that the Roth IRA is a drag on the economy because the money can sit in the account indefinitely with no required minimum distribution. An article in the LA Times yesterday says as much:
All of which makes Roths a perfect “fiscal Frankenstein.” In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.
I can't say I agree with that idea that because the money is in someone's investment account growing – that somehow they're a drag on the economy. To me it speaks to the mindset that far too many have that somehow the government owns everything and is only being gracious and allowing us to have a little taste of our own money. I also don't agree that having money site idle in the private sector is somehow worse for the economy than allowing the public sector to spend it all for us. In the end most will be withdrawing it, and I think having the money in the private sector to actually have people purchasing things, creating jobs, and creating more tax revenue that way is the better way to go.
Another idea that some have put forth is the idea that the government could change it to that people would have to include their Roth IRA withdrawals in retirement as regular income when coming up with the tax due on their Social Security checks. Of course this again would mean more taxes to the government.
Will You Continue Using The Roth IRA?
So with all this speculation out there, do you think that the government would ever go down this road of making Roth IRAs taxable at withdrawal, through capital gains taxes or by including it in social security income? Does it give you pause when thinking about investing in a Roth, or will you continue to invest there anyway because it's all just speculation?
Tell us your thoughts on the Roth IRA and if they'll ever end up making changes to make them taxable at the front end and back.