The Roth IRA is a great tool for the Middle class to ascend to a higher wealth level, if used over a long number of years. So this leads me to ask “Is the Roth IRA in Danger?”
I ask this question because from the government’s perspective, a Roth IRA is a great option as long as it’s not too popular! As more and more people start to use it, the government might start to miss the lost future tax revenue from the capital gains and dividends in Roth IRAs, especially when combined with the delayed taxes from 401K plans.
So what could the government do?
- Do away with the entire option. Of course those that exist would most likely be left intact.
- Change the rules so that the Roth IRA is no longer beneficial for the US population to use.
- Introduce the creation of a yearly fee associated with owning a Roth IRA, perhaps calling it a Retirement Existence fee.
- Spawning of a new Federal Sales and Consumption Tax to make up for the loss in tax revenue from the various retirement accounts.
- Special tax charged for each withdrawal from Roth IRA accounts, perhaps a set amount like $20 per transaction.
The possibilities for the government to tax us is only limited by the imagination of the taxing party in control.
Some would say, that the government wouldn’t do that because we wouldn’t re-elect the officials back into office, but hasn’t these past few years proven that argument incorrect? For example, look at the Cap and Trade Tax (which stealthily increases taxes on all americans), this tax is very unpopular with the majority of americans.
Party lines will do as they please, they are odd that way (especially when they blame their unpopularity on the other party after years of being in office)! It’s sad that the representative for each state don’t represent the people who elect them into office (kind of insulting for the state population too, it’s like of like them saying “you don’t know what’s best for you, evne those people who elected me in…“). This is why the previous seats that were held by the democrats were lost (even in traditional democratic states) and why Republicans lose elections when the become to Pro-life (What does Pro-life vs Pro-choice have with running the government anyway?).
Is the Roth IRA in Danger? I don’t know, but if the tax stream become to dry for the government, they may try to counter it in some way.
-MR
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Update (1/11/11): I wrote this article questioning if the government would somehow figure out a way to take away the loss of future taxes from Roth IRAs and other Retirement instruments, but that doesn’t mean that I don’t still use those vehicles! I have and contribute to both a Roth IRA and a 401K plan.
The way things are I won’t be surprised if they do! I prefer a honest human to a republican or a democrat and I know I’m asking for too much.
Me too, unfortunately it’s the rare politian that keeps their word (sometimes because of no fault of their own).
If the government becomes insolvent, it will have to do something… maybe not tomorrow or next year…
I was just thinking out loud with this post…
I seriously doubt it. If anything, Roth and regular IRAs will be expanded. The government WANTS people to save more money. Because that way they can cut social security benefits without hurting people too badly.
That’s my professional and informed opinion.
The likely reality of Social Security getting cut is why the middle class is getting tired of so much government spending!
As a Gen Xer, I’m very disappointed that I will bear the brunt of the cuts in social security. I feel like I always played by the rules only to get the shaft when I retire someday. Especially with the decline of pensions in America.
I don’t know what to expect from the government anymore. For instance, Social Security is in dire straits, and they end up reducing the SS percentage. I would have never predicted that.
I agree, it’s almost like they want it to fail. I wonder if they forgot that a lot of people are no longer getting a pension from companies?
I don’t know what they’ll do, so I just don’t worry about it. Until the Roth IRA is changed or messed with in some way, I’m going to continue funneling money into it. If the government ever does mess me over, I doubt I could have prevented it by not taking advantage of it now anyway. 🙂
I’m going to keep funneling money into it too!
If someone is considering about whether to participate or not, I would definitely jump in! It’s one of the best benefits for those don’t make over the allowed contribution limits!
In “The Gospel of Roth- The Good News About Roth IRA Conversions and How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that everyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.
They already took the tax for the Roth IRA so they can’t complain about the present.
If I was the government and need more money now, I would get rid of 401k and move all contribution to Roth. In the future, I can always pass a consumption tax to get some of that “tax protected” money.
What do you think about this?
I called it a Sales and Consumption Tax, but it’s the same thing. Yes, it’s entirely possible, and even probable, depending on if they get their financial house under control or not…
Actually, 401K aren’t as bad as Roth IRA from the government’s perspective. 401K are being taxed after they have appreciated and they may raise the tax rates by then so they will make out big. But with a Roth, they are tax low, but then they appreciate and the aren’t taxes at all when they are worth much more… Even if the raise the income tax percent, Roths (if keep intact) aren’t touchable.
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2011 saw the elimination of over-the-counter medical expenses through FSAs.
Restrictions on Roth IRAs, perhaps replaced with “guaranteed” Government Treasury bonds, are not that far-fetched.
It’s for the children.
Yep, you never know… I think it’s wise to consider all the possibilities, especially considering the current financial state of the country.
Well, I suppose if you want to play it really safe you can do both Roth and Traditional. I know I’m going against the grain but I’m sticking with Traditional for the most part. Once we get our Emergency Fund fully funded I might look into opening a side Roth account.
Sounds like a good plan to me, but why not combine the 2… Make your Roth IRA your emergency fund?
You can take out your contributions at any time (penalty and tax free). You may not be able to put the money back in the Roth though…
I don’t have a roth because it doesn’t make sense to me, and it won’t go anywhere soon since it’s so popular. they might make some rules more stringent, but go away entirely? nah!
Maybe, but the Roth IRA is new, it was created as part of the Taxpayer Relief Act of 1997. It’s a law and laws can be changed or altered.
More deviant measures would be a federal consumption tax as a way to tap into the roth (and any investment) stream. Or even worse, a Net Worth (or Wealth) Tax… Scary huh 😉
I try not to worry about things I can do nothing about. Even if they do away with it, it will probably not effect the existing accounts. The best thing of achieving your financial goals is you can have access of professionals who can deal with these issues.
As BIFS stated alluded to above, it’s out of my control, so I’m just going to hope for the best and continue to plow my money into the account too!
Have there been any serious calls for action like this? It seems crazy, but I guess anything is possible with the national finances as bad as they are. They could even claim that it helps the economy by incentivizing people to save less and spend more. I love the Roth IRA for the tax break it provides but I hate letting the government get anywhere near my money.
No calls, I was just thinking out loud… but it’s very possible. It all depends on the way the governmental winds are blowing.
The Roth IRA is a great deal, especially for the middle class!
i never thought twice about the roth until the recent couple years. you never know, Sam might decide to tax it at some point, claiming that the nation needs it. the 401k is sounding like a better option, where tax is due upon withdrawal regardless
I agree the Roth may be endangered. Not so much by direct legislation but by increased fees as a revenue source and less reliance on income tax.
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