Kitces: Will Congress Someday Repeal The Tax-Free Roth IRA Promise?

[jfoxcpacfp]

Interesting article/video just out. Of course, he's talked about several of these options before, but this is the first I've seen the VAT tax potential tossed into the ring. Sometimes, I wonder if all the public ruminating done by financial wonks actually helps to give an idea credibility and propel it into the mainstream.

[The White Coat Investor]

I wish those who think tax-deferred investments are "time bombs" would consider that Congress can repeal the laws on Roth IRAs and cash value insurance just as easily as they can raise tax rates.

[Hatton]

For me the compelling reason to convert my SEP/IRA to a Roth as I retire is to lower my RMDs.  Kitces video really makes me reluctant to do this if Congress turns around and forces RMDs on Roths! Politicians sure make retirement planning more complex.

[Zaphod]

hatton1 wrote:

For me the compelling reason to convert my SEP/IRA to a Roth as I retire is to lower my RMDs.  Kitces video really makes me reluctant to do this if Congress turns around and forces RMDs on Roths! Politicians sure make retirement planning more complex.

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I assume by the time I retire its likely even ROTHs will have rmds. I guess the only way to get around that is to draw it down as tax efficiently as possible and place it in a taxable account. Im doubtful that they will remove the tax benefit from roths, as its a funding mechanism and while yes, some like those on this board will maximize it greatly, the vast majority will pay tax and not build it to anything of significance.

They could always place an upper limit or rmd threshold and kill the basis reset without messing with their revenue or your tax benefit.

[jfoxcpacfp]

Zaphod wrote:

I guess the only way to get around that is to draw it down as tax efficiently as possible and place it in a taxable account.

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Why would you not simply let it grow tax free until you were forced to take RMDs?

[Zaphod]

jfoxcpacfp wrote:

Zaphod wrote:

I guess the only way to get around that is to draw it down as tax efficiently as possible and place it in a taxable account.

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Why would you not simply let it grow tax free until you were forced to take RMDs?

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Was thinking tIRA/401s not roths, sorry should have been more specific, jumped right from ROTHs to RMDs in general.

[TheGipper]

Most likely changes to Roths would be elimination of backdoor contribution and forced RMDs. The former could happen at any time, the latter would likely require Dems in White House and control of congress.

I doubt there will the political will to start taxing Roth accounts as this would not only break a promise but affect many middle income Americans and voting seniors.

But the fact that these changes are even being talked about further confirms my decision not to do any early Roth conversions while I am still working. Unless of course, a republican tax plan passes which significantly lowers top marginal income rates.

[Zaphod]

A backdoor roth, while contributing to inequality has a good balance sheet effect of bringing future taxes into today so its still a net positive for the government on the balance sheet, politically its another story but hard to believe they would push that extra money away lightly.

[asmallchild]

Does this affect anyone's contributions towards their 401k?

For instance, if you believe strongly that the backdoor Roth IRA loophole will be closed, would some consider contributing to a Roth 401k for tax diversification even though it might not be the soundest decision tax-wise currently?

[TheGipper]

One would think, but Obama has now proposed it twice, and congressional Rs may also find it useful for long term accounting as part of tax reform and as an effort to seem fair by eliminating "loopholes".

[TheGipper]

In response to a smallchild, I am less likely to convert or contribute to Roth accounts now due to forced RMD possibility and chance of future lower top marginal income rates as part of tax reform. I'll stick with traditional 401k, and if there is an opportunity in the future to contribute or convert at 20-25% tax bracket, I'll consider it then.

Even if I'm wrong and top marginal rates go up, I will be converting in retirement to Roth in the <25% effective tax bracket, which I feel is very unlikely to go up.