Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Are you afraid that the tax system will be changed to VAT, making a Roth a bad deal?
Old 04-03-2010, 04:55 AM   #1
gone traveling
 
Join Date: Oct 2009
Posts: 125
Are you afraid that the tax system will be changed to VAT, making a Roth a bad deal?

I am wondering. I keep hearing a lot of folks say that with the mounting deficits, the only way to raise enough revenue is for the federal gov to replace the current income tax with a VAT. It seems to me that such a change would essentially screw over folks who have already paid the tax to fund the Roth.

Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
__________________

__________________
swampwiz is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-03-2010, 07:12 AM   #2
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by swampwiz View Post
Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
I'm not afraid of tax changes at all; I recognize what is today will be changed in the future.

That's why DW/I have retirement investment accounts that take all of the "known" variations into account.

While my DW/me are older (in our 60's), we did take advantage of Roth IRA's when they became available. That means our major portion of retirement investments are in tax deferred accounts (e.g. TIRA's and 401(k) rollovers to TIRA's).

We also know that the majority of our estate will be going to charity and if current tax laws concerning distribution of an estate to charity remain in force, most of our TIRA's will be passed on without any tax due.

While we do have a bit in Roth IRA's (Roth 401(k)'s were not available during our accumulation years, we look to draw down our TIRA's and use the Roth's to adjust our taxes if we're close to going into the next bracket (adjustment done in early December).

We treat taxes the same way we have our respective portfolio's structured; that is don't "bet" on any current/future policy. Just try to be flexible enough to get some advantage out of anything that may come up in the future.

That's life ...
__________________

__________________
rescueme is offline   Reply With Quote
Old 04-03-2010, 07:24 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
travelover's Avatar
 
Join Date: Mar 2007
Posts: 9,896
I think high inflation is more likely, as raising taxes takes congressional courage.
__________________
Yes, I have achieved work / life balance.
travelover is offline   Reply With Quote
Old 04-03-2010, 07:29 AM   #4
Thinks s/he gets paid by the post
 
Join Date: May 2005
Location: Texas
Posts: 1,038
Quote:
Originally Posted by swampwiz View Post
I am wondering. I keep hearing a lot of folks say that with the mounting deficits, the only way to raise enough revenue is for the federal gov to replace the current income tax with a VAT. It seems to me that such a change would essentially screw over folks who have already paid the tax to fund the Roth.

Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
More likely there will be a VAT and Income tax!
__________________
In theory, theory and practice are the same. In practice, they are not.
Lazarus is offline   Reply With Quote
Old 04-03-2010, 07:47 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,439
Quote:
Originally Posted by Lazarus View Post
More likely there will be a VAT and Income tax!
I was thinking the same thing.
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Old 04-03-2010, 07:53 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,645
Quote:
Originally Posted by Lazarus View Post
More likely there will be a VAT and Income tax!
+1 But I doubt the income tax will be very steep. More likely a modest hike on high earners that balances over-balances the regressive impact of the VAT.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is online now   Reply With Quote
Old 04-03-2010, 08:05 AM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
It concerns me, but there's little I can do beyond hedging my bets.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-03-2010, 08:11 AM   #8
Confused about dryer sheets
 
Join Date: Mar 2010
Posts: 5
If the fed went VAT only, wouldn't it need to be like 25%?
__________________
Dogtrack is offline   Reply With Quote
Old 04-03-2010, 08:16 AM   #9
Thinks s/he gets paid by the post
Rustic23's Avatar
 
Join Date: Dec 2005
Location: Lake Livingston, Tx
Posts: 3,624
Our elected official, both parties, are drunk on spending. It is how they stay in office, and it has worked. I have to vote it will be both, and I don't look for any great reduction in income tax.
__________________
If it is after 5:00 when I post I reserve the right to disavow anything I posted.
Rustic23 is offline   Reply With Quote
Old 04-03-2010, 09:55 AM   #10
Confused about dryer sheets
 
Join Date: Sep 2007
Posts: 8
We are in early 60s. I am retired TX teacher drawing a 20yr pension. My husband is still working and plans to continue for probably 3 yrs at least. Our full SS is at 66.

We have never been able to start a Roth account either on our own or through employers. Now to take advantage of the conversion opportunity, we are seriously considering turning our two personal IRA accounts into Roths and changing over a vested 401K of my husband's still located at a past employer into his IRA as well. The ability to avoid minimum distributions and the inheritance factor make a Roth attractive to us. We do want to leave our children (possible grandchildren) as much of our estate as we can.

Currently my husband has income from an S-corp set up with a single-employee defined-contribution plan--as well as income working at company with a 401K plan he contributes to.

Our IRAs contain some privately traded REITS we were "advised" to buy several years ago when we were using a different investment advisor and their value has dropped significantly. Selling them, taking the loss, and moving on seems the wisest decision at this point. The other investments in the accounts have seen improvement in the past year because we never pulled out of the market. By converting to a Roth now, we can mitigate the tax bill in two ways. Because the value of the accounts are lower and by making contribution into my husband's S-corp defined contribution plan designed to offset the income-conversion. I hope I explained that correctly, At the recent meeting with our CPA/financial advisor, he felt that there were several options that would allow us to make the change and minimize the taxes owed.

He has not necessarily been in favor of making this conversion although I have asked about it for the past two years. He had anticipated having my husband sell the S-corp to stop the income stream at retirement and reconfigure our investments to our tax advantage. But that seems less and less likely to happen for various reasons.

Overwhelming majority of our retirement assets now are in his tax-deferred accounts. The IRA funds (after moving the vested 401K into husband's IRA) are probably 15% of our overall retirement assets. It just seems to make sense to try to maximize their future benefit by taking advantage of a Roth conversion.
__________________
loves2read is offline   Reply With Quote
Old 04-03-2010, 10:04 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
I estimate 0% chance of replacing the FIT with a VAT. However, I think there's a good chance of getting a VAT or some type of national sales tax in addition to the FIT.

Since I don't see FIT rates going down in the future, I'm doing a little Traditional IRA to Roth IRA conversions, mainly to give me flexibility if we run into RMD issues.
__________________
Independent is offline   Reply With Quote
Old 04-03-2010, 10:08 AM   #12
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Quote:
Originally Posted by swampwiz View Post
Are you afraid that it could happen, screwing you over? Have you considered putting your cash into a traditional IRA/401K instead of a Roth for this very reason?
Tough choice:
- Doing nothing and getting hammered by traditional IRA RMDs at age 70.5,
or
- Taking advantage of the conversion opportunity while there's still an opportunity.

I've rarely seen anyone craft a successful investment plan around potential tax legislation...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 04-03-2010, 10:13 AM   #13
Confused about dryer sheets
 
Join Date: Sep 2007
Posts: 8
our financial guy said basically the same thing on more than one occassion--that taxes are a fact of life pre or post retirement and you just deal with them as they come up
it is very unlikely that we are going to be dropping into the lowest rung of tax % anyway == at least in the early years of retirement, as long as my husband continues to receive the income from his S-corp...
and this coversion into a Roth with our IRAs is basically our opportunity to fund a Roth because we still are over income and currently don't have Roth account option where he works now...
so it is now or never to get a Roth...I do think that loophole will be closed -- if not this year--then in 2011--too much money is going to flee to the dark side (tax-free).
__________________
loves2read is offline   Reply With Quote
Old 04-03-2010, 10:40 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
There's almost zero chance that a VAT would replace the FIT. The VAT would be an add-on.

If any consumption tax is implemented (either a VAT or a National Retail Sales Tax--which would be better for US competitiveness than a VAT), then Roths become less of a good deal. We've got some money in Roth IRAs and some in 401Ks/Traditional IRAs so that we've got more flexibility on all these issues. Advantages of splitting things up:
-- Lower RMDs than if everything were in Traditional IRAs.
-- Ability to tailor taxable withdrawals from TIRAs to stay under the higher FIT brackets
-- Flexibility regarding future tax legislation--we can move money or spend preferentially to avoid getting walloped when the political winds change.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 04-03-2010, 10:51 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Lazarus View Post
More likely there will be a VAT and Income tax!
That's right. It would be much easier for our lovely congress critters to add a modest VAT tax into the scheme, keeping everything else in play, than to cancel the income tax and add a large VAT.

After the modest VAT beginning, they can increase it over time as their needs increase. And they can keep or increase the income tax simultaneously.

The only negative for the gov't is that once they are taking 100% of our income through income tax, there will be little to gather with the VAT tax. That is, you can't take it all twice.

But they can try.
__________________
youbet is offline   Reply With Quote
Old 04-03-2010, 10:52 AM   #16
Thinks s/he gets paid by the post
Leonidas's Avatar
 
Join Date: May 2006
Location: Where the stars at night are big and bright
Posts: 2,847
Who knows what our beloved politicians will come up with to modify the tax structure in the U.S. over the next several decades. Dig out your Ouija board and ask the spirits.
Quote:
Originally Posted by Nords View Post
I've rarely seen anyone craft a successful investment plan around potential tax legislation...
Quote:
Originally Posted by loves2read View Post
our financial guy said basically the same thing on more than one occassion--that taxes are a fact of life pre or post retirement and you just deal with them as they come up.
All good advice. I'll take advantages that make sense now, and do my best to adapt to future changes. My primary concern is making sure that my investments perform adequately to continue to fund my life of leisure and self-imposed unemployment.
__________________
There is no pleasure in having nothing to do; the fun is having lots to do and not doing it. - Andrew Jackson
Leonidas is offline   Reply With Quote
Old 04-03-2010, 11:02 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by Nords View Post
I've rarely seen anyone craft a successful investment plan around potential tax legislation...
Here's a testimonial to that, or at least to the concept of letting the tax tail wag the profit dog.

The single biggest financial boo-boo I've made involved letting tax consequences alter an investment decision. I postponed harvesting a nifty gain in order to move the taxes to the next year (I was receiving a significant severance package in the current year) and watched the gain totally disappear as I waited. But it did solve the tax problem: no gain = no taxes!

I made a note of that........
__________________
youbet is offline   Reply With Quote
Old 04-03-2010, 01:34 PM   #18
Thinks s/he gets paid by the post
growing_older's Avatar
 
Join Date: Jun 2007
Posts: 2,608
My crystal ball isn't always accurate, but it predicts rising inflation to help the feds reduce the impact of the big debts that's been run up, coupled with a VAT on top of existing FIT. VAT or national sales tax will start slow and ramp up over a few decades.

I don't see how this reduces the benefit of a Roth in any way. Adding VAT or national sales tax on top of the current FIT leaves the Roth advantage alone. If FIT was reduced in the future, then the Roth advantage could be less, but that seems unlikely (at least to my crystal).

Potential early retirees are a small minority, so it's unlikely tax policy will be arranged for our benefit. Hopefully, we are a small enough group that it isn't worthwhile to arrange tax policy to try to extract much extra from us either, since our numbers are so low. At least that's what I hope.
__________________
growing_older is offline   Reply With Quote
Old 04-03-2010, 01:38 PM   #19
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by growing_older View Post
I don't see how this reduces the benefit of a Roth in any way. Adding VAT or national sales tax on top of the current FIT leaves the Roth advantage alone. If FIT was reduced in the future, then the Roth advantage could be less, but that seems unlikely (at least to my crystal).
If they merely *added* a VAT or national sales tax and didn't cut the income tax, it wouldn't reduce the attractiveness of a Roth one bit. But if they introduced a (say) 15% VAT in exchange for a 5% cut in income tax rates, that would reduce (but not eliminate) the tax advantages of a Roth.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-03-2010, 01:46 PM   #20
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,470
1. More tax will have to be paid in the future.

2. The people that want the taxes will find a way to get them regardless of what any of us do (excepting tax lawyers, tax accountants and tax cheats)

3. The best way to protect ourselves is to save more, spend less, invest the difference.

Quote:
I've rarely seen anyone craft a successful investment plan around potential tax legislation...
Anyone who tells you different is selling something.
__________________

__________________
MichaelB is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tax Brackets and Provisions Little Changed For 2010 haha FIRE and Money 12 10-17-2009 09:43 PM
Are leaseholds a bad deal? ARB57 FIRE and Money 7 01-14-2009 11:34 AM
FIRE Easier If VAT Replaced Income Tax? RetireeRobert FIRE and Money 54 11-16-2007 08:00 PM
roth 401k and roth dont seem good deal mathjak107 FIRE and Money 29 05-29-2006 06:43 AM
making lawyers look bad Martha Other topics 68 06-12-2005 09:23 AM

 

 
All times are GMT -6. The time now is 09:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.