Sunday, June 05, 2011

What is the future of the Roth IRA?

At the conference I recently attended, one of the speakers brought up an interesting point about Roth IRA’s.

As you may know, Roth IRA contributions are made with after-tax dollars and are allowed to grow income-tax free as long as you, or possibly your children or grandchildren, own the account. With that in mind, many Traditional IRA holders are taking advantage of the current low income tax rates, paying income tax and converting their pre-tax IRA’s to Roth IRAs.

So what is the problem?
According to the speaker, government has mortgaged their future. With Traditional IRA accounts, they are guaranteed a steady stream of revenue. When a pre-tax IRA account holder turns 70 ½ they are required to begin taking taxable distributions, thus making income tax payments. In the future, with the majority of Traditional IRAs converted to Roth’s and new money invested in Roth’s (many company 401(k) plans now offer Roth IRA options as well) the government will no longer receive steady income from retirement accounts.

So what will happen to the Roth IRA?
The government, needing money, will change the rules. At the very least, earnings on Roth IRA contributions will become taxable.

For now Roth IRA’s remain a good deal, so take advantage while you can.


  1. A very good - and interesting - point. W

    hen I was without a 401(k) for a couple of years I took the amount that would have been going there and put it into a Roth. I don't want to take the tax hit now to convert, but I bet it will not be long before new Roths are taxable on withdrawal.

  2. Anonymous3:58 PM

    And if you are lucky enough to still working while drawing Social Security (which you pay/paid out of your salary) you are now expected to pay tax on that Social Security AGAIN. Sounds like double taxation to me and I would not be surprised if government figured out that double taxation on Roth IRAs is a great idea!!M

  3. Anonymous9:30 AM

    I love how you explain it so carefully so that it makes sense. Thanks for the info. Just stopping by from LBS. ;)

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  5. My thinking is that even if tax laws change on the Roth, any contributions made beforehand will be grandfathered--the tax code is riddled with such special provisions.

    That means it will be worth participating in a Roth IRA for as long as it remains in the same tax status as it does now.

    Another point is that Roths are relatively new and don't have the vast amounts of capital tied up in them that 401k's or even IRA's have. That means they're very likely to be overlooked in the rush to raise tax revenue.