Government going to steal from ROTH IRA holders?

[swingline]

I'm thinking about starting a ROTH IRA and want to figure out something before the end of the year so I can max out contributions before 12/31 and then in January.

 

Clearly a lot of people think they're going to put money in and then take it out tax free as the current rules allow. But I think there's a huge chance that in the future the government is going to change the rules and then tax withdrawals anyway. The government does so many crooked things and of course someone is going to argue that they are "losing" money because they are letting people withdraw from their Roth's per the original agreement.

 

What do you think? Is this a realistic fear? Am I better off just doing a traditional IRA and taking a tax break up front for the contribution and then paying the tax when it comes out?

[Seabee]

I have a hard time believing they would approve double taxation. The worst I think would happen would be taxation of earnings, and even that would likely receive significant opposition. One change that does seem possible is changing the code to include ROTH distributions in determining taxable social security.

[Kevin20]

I'm thinking about starting a ROTH IRA and want to figure out something before the end of the year so I can max out contributions before 12/31 and then in January.

 

Clearly a lot of people think they're going to put money in and then take it out tax free as the current rules allow. But I think there's a huge chance that in the future the government is going to change the rules and then tax withdrawals anyway. The government does so many crooked things and of course someone is going to argue that they are "losing" money because they are letting people withdraw from their Roth's per the original agreement.

 

What do you think? Is this a realistic fear? Am I better off just doing a traditional IRA and taking a tax break up front for the contribution and then paying the tax when it comes out?

 

Obviously there's no guarantees. The government COULD do that, and there's not much we could do about it. Some people see it as an issue of a bird in the hand is worth two in the bush.

 

But, I think it's unlikely. I could imagine the government changing rules regarding new accounts and new contributions, but even if so they'd likely grandfather existing accounts in order not to renege on the expectations up to that point That in fact is the precedent set in the past when the government has closed down similar good deals (there was a major change to taxation of cash-value permanent life insurance years ago, and existing accounts were grandfathered and protected from the change). In short, we might lose access to a good deal going forward, but we won't totally be ripped off.

 

Keep in mind the Roth IRA has one very good thing going for it, from the tax man's perspective. We pay taxes on those contributions NOW. Roth is a way for people to save for retirement, while paying taxes this year on that money saved. Back to the bird in the hand -- the government is short-sighted and so far more interested in taxes we pay NOW than in taxes we will or won't pay 30 years from now. Unless the government wipes out any and all tax-preferred account types, I think Roth would be the LAST to go.

 

By the way, all that said, It's a prudent idea to use both the tax deferred savings (401k and Traditional IRA) and the Roth IRA. Because you can't actually be sure which approach will be most advantageous, not until it's all over.

Edited October 22, 2012 by Kevin20

[swingline]

Thank you so much for the responses.

 

I do think a "bird in hand" is better than counting on the US Government to do the right thing in the future. I really could see some politician making a case that they are "losing all that money that could be taxed" even though that was the original agreement and purpose of the Roth.

[loanuniverse]

There is always a chance, but I disagree with it being a huge chance. I think there are other places that might get affected first. Even if they stopped the whole Roth IRA program tomorrow, can you imagine the chaos if they did not grandfather the existing accounts.

[Athena53]

I have a hard time believing they would approve double taxation. The worst I think would happen would be taxation of earnings, and even that would likely receive significant opposition. One change that does seem possible is changing the code to include ROTH distributions in determining taxable social security.

 

As you just pointed out, SS can be taxable if you have other income. So, they take your SS payroll taxes out of income that's already been taxed, "give" some of it back to you in the form of SS, then tax it again when you receive it- in my DH's case, we paid $7,000 extra in taxes due to his SS income.

 

So they double-tax already. To answer the OP's question, I hedge my bets. Right now 50% of my contributions are into a traditional 401(k) and the rest into a Roth.

[hegemony]

I would max a ROTH is you qualify. One of my biggest mistakes was not doing so and for over a decade I have not been able to directly contribute to a ROTH IRA. Besides, the max contribution is very low so even if something nefarious happens it is not a ton of money. be sure to pursue other retirement vehicles.