future taxation of ROTH distributions

[Guest overly concerned?]

what are the barriers, if any, to Congress taxing Roth IRA "earnings" distributions ( as opposed to already-taxed contributions) in the future?

[Belgarath]

Public opinion.

Congress could change the tax treatment any time they so choose.

[mbozek]

Public opinion.

Congress could change the tax treatment any time they so choose.

As was done twice when Congress taxed the portion of Social Security benefits that were not attributable to employee contributions - 50% in 1983 then 85% in 1993.

[John Feldt ERPA CPC QPA]

I think Richard Gephart already proposed that a few years back, but it died.

[John G]

Public opinion in deed!

Congress can change the rules. Remember, the Roth was and expansion of the IRA concept.

However, with the Roth, Congress made a "social contract" with citizens. They explicitly declared that Roth distributions were tax free. To change that would be a huge rip in the social contract. Congressman would lose elections over that one.

[J Simmons]

Historically, there have been other 'huge rips' in other 'social contracts'.

I think there are many more voters that do not have and do not understand Roth benefits than those that would be affected by Congress now going sideways on Roth taxation.

[John Feldt ERPA CPC QPA]

Maybe it goes something like this:

Misleading Headline #1 (10 years from now):

Corporate Executives Find Loophole to Withdraw Six-Figures from 401(k) While Avoiding Taxes.

Misleading Headline #2 (15 years from now):

Wealthiest Americans Not Paying Taxes on Six-Figure Payouts from 401(k) Plans.

Misleading Headline #3 (20 years from now):

Rich Americans Get Richer by Withdrawing MILLIONS from 401(k), Refusing to Pay Taxes. Congressional action expected.

Maybe the timeline will be longer/shorter than above and the villains will differ. Perhaps the first congressional action will only pertain to those whose Roth balances exceed $150,000. Maybe none of this will ever happen... but history has shown how these things can and do happen.

[John G]

401K.....wrong board. This is the Roth/Ira board.

I see some differences between a personal contribution type of retirement mechanism and something that is driven off of salaries and may include skyrocketing corporate stock.

Witness the recent comments about executive pay being sometimes 300x higher than the average worker - way above historical norms. [And for all that wonderful pay, we get a bunch of execs who endorse business plans like sub-prime bundling that they don't even understand....but don't get me started about folks getting big bucks to make mistakes and walk away.]

300x is likely to direct the scrutiny to the AGI, Bear, Lehmen, World Com, Enron crowd. I don't see the link to Roth IRAs.

[John Feldt ERPA CPC QPA]

So where do folks roll over their Roth 401(k) balances after they leave an employer . . . would it be reasonable to think that it rolls to a Roth IRA? If so, let's re-word it:

Maybe it goes something like this:

Misleading Headline #1 (10 years from now):

Corporate Executives Find Loophole to Withdraw Six-Figures from IRA While Avoiding Taxes.

Misleading Headline #2 (15 years from now):

Wealthiest Americans Not Paying Taxes on Six-Figure Payouts from IRA Accounts.

Misleading Headline #3 (20 years from now):

Rich Americans Get Richer by Withdrawing MILLIONS from IRA, Refusing to Pay Taxes. Congressional action expected.

No?

[Guest Sieve]

I hate to say it, but anybody who convinced clients that their grandchildren would be able to take tens of millions of dollars--or even significantly smaller amounts--of tax-free distributions from a rollover Roth IRA over a period of decades, and that the tax laws governing Roths would not change during the 80 years over which the conversions, contributions and distributions were being projected, and actually believed it was true, was smoking something highly illegal in most states . . .

Generally, we suggest to clients that they assume tax laws will remain unchanged when making such projections into the future, but with Roths it has always been, in my opinion, foolish to make such an assumption for any projections more than a few decades out.

[jpod]

You can dazzle me with the arithmetic and projections all you want, but when it comes to Roth 401k I say: don't look a gift horse (i.e., the tax exclusion for contributions) in the mouth. That is my bird in the hand theory. Roth, Shmoth. Does anyone remember the "excess distributions" excise tax from the 1986 Act and the related provision that conned people into taking taxable distributions earlier than they had planned in order to avoid the excise tax?

I'm certain that for people of a certain age and a low tax bracket who have a crystal ball, Roth makes a lot of sense when you crunch the numbers, but you're making a big assumption about future tax laws.

[eeyore]

Ah, yes, I recall Sec. 4971A. My Dad was probably the lowest-paid person ever to pay that tax. (Having grown up in the depression, he deferred every nickel he could, and he worked for a large company with lots of plans with high limits--stock, thrift/savings, profit sharing, all in addition to a DB. Time was.)