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Move to do away with Roth


Guest dlsife
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Guest dlsife

According to the news story on this site, Gephardt introduced a bill to do away with Roth's and to make all retirement account distributions taxable. This is not going to make young investors save.

I just know that sometime between now 30 years in the future when I retire, Congress will get greedy and change all of my Roth tax exempt savings to taxable.

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EGTRRA allows for the creation of Roth 401k's effective in 2005. It seems a little too soon for Congress to be changing laws just recently passed, though this is Congress we are talking about.

I don't believe the Roth is going away in the near future. Long term, too hard to tell.

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This is the silly season for our elected representatives when they introduce legislation that has no possiblility of passing because they want to please their consitutiencies in the fall elections. E.g. House Republicans passed a bill which would make estate tax repeal permanent in 2011 but the Senate said no because it would cost $58 billion. This gephart legislation is the same -- since the House is controlled by the Republicans, tax legislation introduced by a Democrat has no chance of even being reviwed by the Ways and Means Committee especially when there is other major legislation pending before the Nov. election. There will be no major changes to the tax laws unless the Democrats get control of the House in Nov., because all tax legislation must originate in the House. The Gephart legislation is counter intuitive-- by eliminating Roth IRAs it will encourage taxpayers to contribute to regular IRAs and thus increase the revenue loss to the government. Sounds stupid but this is the silly season.

mjb

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Guess I am a cynic. I firmly believe the Roth will continue to exist but in the next 20 to 30 years you will see the same taxation as Social Security. Who would have thought, in 1950, that any portion of SS would be taxed. I see the IRS setting income limits - if you make over $ amount a portion is taxed.

JanetM CPA, MBA

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Guest dlsife

My point is not that they could take away this benefit in the coming years. Rather, its that they could take away the Roth benefits in 15 years. Who knows which party will control congress at that point. My concern is not that they'll take away the ability to create and fund Roth's, but that they'll make my distributions from my own Roth taxable. Essentially what I'm saying that it seems to be taking a big risk by assuming that the gov't will keep its word with regard to the money I'm currently sticking into my Roth. I can see myself funding a Roth for 20 years and then have the government decide that I'm too rich and tax the distributions anyway.

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As the percent of taxpayers owning a Roth grows, it will become harder to change the rules because you affect too many voters. Look at how effective seniors and the AARP are in setting the agenda for elderly issues. Any proposals to kill the Roth would generate a lot of heat, which probably means Congress would grandfather existing accounts and just end new participation if they act at all.

Think about Roth conversion families. They already paid taxes on the conversion. If Congress tried to tax them again on withdrawals I would not blame these folks for bolting the country. Nothing like majors lies from your government about taxation to generate some Thomas Jefferson like revolutionaries or perhaps get a few new faces running for office.

A much more likely and sneaky way to try to tax Roth distributions would be to use the AMT and claim you were only taxing the "super rich". There are problems with that as well. As the number of millionaires swell [yes, even in this stock market], the "super rich" are not just a handful of Rockerfellers and Vanderbuilts. They include some grandmothers who never went to college but were buy-and-hold stock owners, some folks who owned residences for four decades, the carpet cleaner guy with 6 vans, etc. As the number of people with substantial capital gains imbedded in their home grew, Congress changed the laws to allow a taxpayer to keep up to 500k in capital gains on sale. Members of Congress have also grew uneasy about the 600k estate tax threshold when the number of families that hit it grew. It is easy to tax a small group of wealthy families. It is hard to make those rules when the percentage of those affected grows.

Safety in numbers. An odd concept, but it sure seems to shape tax policy.

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John G, I have to disagree - look at social security. Seniors and the AARP have not been sucessful at getting that tax repealed.

The govt makes the rules, they (depending on who is incharge at the time) will make whatever changes they deem fairest to their constituency not the public.

We can vote they out sure - after the fact.

JanetM CPA, MBA

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Guest dlsife

I am in my late 20's. By the time I'm in my 40's, the baby boomers will all be in retirement. There will be two retirees for every member of the workforce. Who do you think will hold the political clout then?

In order to support all of the benefits that the boomers believe that they are "entitled" to: free prescription drugs, condo on flordia, etc., there will need to be huge infussions of money.

Of course, with so many retirees, they'll be able to do anything that they want to the generation behind them. And some greedy politicians will be all to ready to help out.

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I cannot predict the future, but there is NO way the govt can tax the portion of Roth money that has already been taxed. So the worst case scenario is that they can tax the Roth earnings.

Even that is of questionable legality IMO since the people who paid the tax on the conversions, and even those who contributed the already-taxed money, did so based upon an understanding of the tax law.

I would guess that any change would either freeze the accounts and stop new contributions/conversions, or pick a date (12/31/xx) and tax the earnings subsequent to that date.

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Guest dmalcolm

If you collect unemployment you are taxed on that, and that is already a tax from your pay. If the gov't can do that, why cant' they decide to tax your Roth distributions. They'll just claim it's income.

Dave

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Unemployment income is taxed because it is considered a payment from an employer to the employee which the ee did not make a contribution. Federal income tax is never levied on the portion of payments attributable to the employee after tax dollars, e.g., annuity payments under IRC 72 or disability benefits under IRC 105. Fed tax is levied on SS payments under the theory that it is an employer provided benefit for which the employee was not taxed under the IRC. In congress think the amount of the SS retirement benefit attributable to an employee's after tax contribution (5.7% of pay up to the FICA limit) equals about 15% percent of the SS benefits, hence up to 85% of the benefit (attributable to the er contributions and earnings on both er and ee contributions) can be subject to income tax.

Since nothing is ever permanent in the IRC (e..g, universal IRAs only lasted from 82 to 86, comp limits on qual plans go up and down, etc.,) Congress can change the law prospectively to tax the earnings on any amounts contributed under a Roth IRA but not the amounts of a Roth IRA previously included as taxable income, e.g., Roth contributions or conversion amounts.

mjb

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Guest carol lynn

I am FINALLY done paying the tax on my Roth conversion (spread out over 4 years). It wasn't easy. I remember saying at the time I converted that if Congress ever changed the law regarding tax on distributions from Roths, I would be the first one storming the Capitol steps. I was shocked to read about the Gephardt bill on this site. Where was our esteemed 4th estate when this was introduced? In my mind, any tax on Roths is qualitatively different from taxing Social Security benefits, particularly for the wealthy. This is MY MONEY, not a government benefit/entitlement. And, I already paid tax on it years before I would otherwise have had to, based upon the government's promise that I would never again have to pay taxes on the contributions or the gains.

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  • 11 months later...

The relevant question here is can they retroactively revoke Roth IRA's.

I would think that retroactively revoking them would violate the US Constitution and Amendments, but I'm no lawyer. I just have the blanket-sense that retroactive laws are undemocratic (imagine retroactively making smoking illegal, then locking up everyone who smoked).

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They don't have to retroactively revoke them to tax them. At any time in the future, it is completely in their power to say that distributions from a Roth are taxable (either as regular income or have its own special tax rates). It will all depend on how much money is being distributed (and projected to be distributed over their budget window, currently 10 years), how much money the government needs, what their other options are, and who is voting. Nothing unconstitutional about it. They change the tax laws constantly and mess up people's prior planning. I can't believe anyone thinks this is wrong or out of line with what they do all the time.

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MGB, I think that there are some very troublesome legal problems with taxing distributions on RothIRA's, for the following reason:

* They tell us that they put in $3,000 now, the earnings on that won't be taxed (though the $3,000 will)

* Then, if they later decide that they're going to tax the earnings on that $3,000, they have effectively violated a contract with the public. This seems of questionable constitutionality.

Of course I think that this would be wrong. If they do this, then they would be lying to the public (previous statements that earnings on Roth IRA contributions would not be taxed would have been lies).

If they just said that the earnings on all future $3k contributions to Roth IRA's would be taxed, that wouldn't present the same problems. They aren't going back on their word.

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Sorry, that's not how it works. There is no lying involved in your hypothetical. The law can be changed at any time without violating any law, constitution, etc. Of course, it could tick off people greatly and cause them to not vote for them, but that is all.

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Whether or not they can do it, it is still a lie (dishonest) to do such.

If Congress tells you that $3,000 you put in a RothIRA now (and pay taxes on) will be allowed to grow tax free, and that distributions won't be taxed, that is a promise they are making (within the law) to the public. If they later say, "oh, that $3,000 you contributed to your Roth back in 1998, we're going to tax the distributions on that now" then there is no question that they were lying the first time around.

Yea, GH Bush made a big mistake by saying "no new taxes". Part of the reason he wasn't re-elected. That, and the fact that Clinton was a politician's politician, and he didn't take Clinton seriously (can't blame him there).

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Wait a minute!

You are surprised that Congress might go "back on its word"?

As always, Congress giveth and Congress taketh away.

BTW, some people thought that the Roth IRA was a scam anyway, so if it changes, that might not be so bad.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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While the US Supreme Ct has stated that there is no prohibition under the Constitution to retroactively changing a tax provision for a prior year to increase taxes, it is highly unlikely that a republican congress would ever do so because of the adverse reaction from the public. In 1993 the Clinton administration pushed through increases in tax rates retroactive to the beginning of the year and reduced includible compensation for qualified plans from 230k to 150 k for the 93 plan year. It is likely that any change in taxation of Roth IRAs would be prospective for future years, e.g., limiting taxpayers who are eligible to contribute rather than taxing the earnings on the accounts in future years because of the taxpayer's expectation of tax deferral at the time the contraibution is made. When congress abolished the universal IRA in 1986 it allowed amounts which had been contributed by taxpayers above the AGI limit to remain tax deferred for future tax years. One thing that is certain is that the Roth contributions would not be taxed in any event because there was no tax benefit at the time of contribution.

mjb

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mbozek,

Do you know the reference/USSC case where the court decided that retroactive taxation was constitutional? The exact words of the decision would probably shed much light on what Congress can and can't do, according to the USSC.

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There have been numerous challenges over the years to tax law changes that have been retroactive. To my knowledge, they have all failed.

When Roth IRAs were enacted in 1997 (effective for 1998), there was a loophole that permitted an individual under the age of 59½ to convert to a Roth and then pull the money out of the Roth, without incurring the 10% penalty. Congress RETROACTIVELY amended the law in July, 1998 to impose a penalty on such a maneuver. A taxpayer who had taken advantage of the loophole in early 1998, prior to the law's amendment, challenged the imposition of the 10% penalty. He lost.

As far as changing the law on the taxation of Roth distributions, there is nothing to stop the law from being changed to tax the earnings on the account. The original contribution or conversion could not be taxed, since that was already taxed once.

While it COULD happen, I'm not losing sleep over it.

Barry Picker, CPA/PFS, CFP

New York, NY

www.BPickerCPA.com

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Thanks for the info BPicker. I'll try to find some specific cases. BPicker says:

When Roth IRAs were enacted in 1997 (effective for 1998), there was a loophole that permitted an individual under the age of 59½ to convert to a Roth and then pull the money out of the Roth, without incurring the 10% penalty. Congress RETROACTIVELY amended the law in July, 1998 to impose a penalty on such a maneuver. A taxpayer who had taken advantage of the loophole in early 1998, prior to the law's amendment, challenged the imposition of the 10% penalty. He lost.

That's pretty outrageous. Basically, the guy was punished for following the law. If such a possibility weren't there, he wouldn't have done that. So Congress gets to steal 10% of his money because they -- our overpaid politicians who vote on their own undeserved pay-raise each year -- screwed up.

Retroactive law is the stuff of totalitarian government's, like the government of China and the former government of Iraq. It has no place in democracies that supposedly respect the rights of their citizens. All this shows to me is that our system isn't that great after all.

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