Are Roth IRA Owners Likely To Be Subject To Double Taxation?

[blackjack]

Are Roth IRA Owners Likely To Be Subject To Double Taxation?

http://danielamerman.com/articles/2015/RothC.html

[johnny847]

The Roth IRA is effectively a political promise. And it's a very clear political promise. I think everybody understands that the retirement age for Social Security will rise as time goes on - and partly for good reason, considering life expectancy keeps increasing. But the Roth IRA doesn't have this sort of moveable goal post* - they said it won't get taxed, period.
Yes this political promise can be broken. But there will be a public outrage over it. It would amount to political suicide to tax Roth IRA distributions.

*What's far more likely is RMDs on Roth accounts.


If you're really concerned about it, hedge your bets - contribute to both traditional and Roth accounts.


I should also note that many Mustachians retiring before 59.5 plan on using the Roth conversion pipeline. Even if (not that I think this is likely, but suppose) Roth distributions are taxed in the future, for somebody who used the Roth conversion pipeline, they're still getting a good deal because they avoided the taxes upfront anyway.

[MoonShadow]

No one can really say if a Roth is "likely" to be double taxed in the future, but every other form of tax advantaged account suffers the same political risks.  Only a few years ago(during the last crisis) Senator Dianne Feinstein proposed 'nationalizing' 401k plans, to 'protect' retirees of course. It went nowhere this time, but that might not be the case next time.  Yet, Roth's have near term advantages as well, particularly for the very young investor.  Due mostly to the standard deduction for a single person, if a young adult (or teenager) were to have their Roth funded by their Mustachian grandparents instead of an inheritance a decade or two later, those funds would be tax free (for the young adult) on both ends. 

Also, a Roth IRA can also function as a wonderful savings vehicle for a *true* emergency fund, since the contributions (but not the gains) can be withdrawn without penalty at any age, for any reason.  Also, there are about a dozen exceptions to the 10% penalty on the gains; including college expenses, a first home down payment (or actually, the first home in over 3 years), excessive health care bills, disablement, a tax judgement (if you get behind with the IRS itself) and death.  While that last one doesn't benefit you directly, it benefits your spouse, so if each of a couple have Roth IRA's in their name; they protect each other from some of the economic issues of a death of a spouse.  So even with the political risk, a Roth IRA is a wonderful financial instrument.  But since it's not in Congress's own interests (for future taxes) they cap the annual contributions.  So get them while you are young, fund them as well as you can, and fund your childrens' new Roth's as soon as they have a paycheck.

[forummm]

Not a great article. I think it's pretty unlikely that the Roths would be double taxed. The most likely events are, in decreasing likelihood:
1) Status quo
2) Roth contributions are halted
3) You have to pull everything out of your Roths before XXX date or you will be taxed on the gains after that
4) You can pull out your contributions but will have to pay taxes on the gains

People would get pretty upset about a big change in policy other than just #2. But even if they went to #4, that's no worse than what would have happened if I'd saved my money in a taxable account.

[Cpa Cat]

Generally speaking, when a bit of tax law goes out of favor, it gets a cutoff date. In other words, if the government decided that Roth IRAs are too sweet of a deal, then the most likely scenario would be that new Roths and new contributions would cease after a specified year. Old Roths would likely maintain their preferential treatment (but the owners would no longer be able to contribute to them).

Tax law rarely goes back in time to become retroactively effective (with certain exceptions, such as the Tax Extenders that are constantly being renewed at year end for the preceding year - but that's a favorable tax law, so retroactivity is "fair").

This is why 2010 had no estate tax. Congress didn't go back in time and inflict estate tax upon that year once the damage was done - they just fixed it going forward. And this is what would happen to your Roth. Old Roths would be fine, but would be cut off, and whatever new retirement account took its place would have a new name and a new treatment.