Unspoken Risks In Using A Roth

[thefinancebuff]

Quote:

Originally Posted by samclem I'd think it more likely that the law "keeps the promise" by not taxing any Roth withdrawals. But, instead, the amount of those withdrawals (principal and any gains--makes no difference) is added to other income to determine the individual's tax rate, to determine how much of their SS payments are taxable, to determine ACA subsidies, to determine eligibility for various other subsidies and assistance, tax bracket for Cap Gains and Dividends in taxable accounts, etc. So, the Roth withdrawal was never taxed, it just caused your other taxes to go up. That counts as "keeping the promise" in DC.

Just like muni interest, tax free, but it's included to determine MAGI for Social Security, ACA tax credit, and maybe something else.

[Senator]

Unless you have more net worth than the average member of congress, I do not think it will ever affect you.

[mpeirce]

Quote:

Originally Posted by Ed_The_Gypsy The most serious threat to Roths I have run across is requiring RMD s for them.

+1

I actually expect this at some point.

The other threat to a ROTH is some sort of consumption tax. I doubt they'll call it a VAT, but a national sales tax applied to certain products (carbon tax anyone?) is another way to raise taxes.

I actually support a consumption tax, IFF we eliminated the income tax. The real danger is adding consumption taxes while keeping the income tax.

[kaneohe]

Quote:

Originally Posted by growing_older Whoa, whoa, whoa. There's no "correct" about it. You are merely speculating about details of rules that have not yet been written for a concept that hasn't been raised for a future tax modification that hasn't been drafted, or in fact seriously discussed, anywhere other than in speculative articles looking for click-audience. This isn't even vapor. It's fantasy. Impossible to rule out, but way too far from reality to seriously discuss.

Sorry if it wasn't clear to you (and the site doesn't help because it doesn't quote the entire post being quoted)........this is existing law for withdrawal of earnings from Roths.

[LOL!]

OK, if one accepts that there are risks to Roth money, what does one do?

A Roth is still one of the best places to avoid taxes: Contribute to a Roth without paying taxes and withdraw from a Roth without paying taxes. What's not to like about that? (And if you have to ask me how does one contribute to a Roth without paying taxes, then you are still working.)

[pb4uski]

Also, since Congress tends to make tax changes prospectively and not retrospectively, if it seemed that there were going to be changes adverse to my interests I could just empty my Roths and put the money in my taxable accounts.

[kaneohe]

Quote:

Originally Posted by LOL! OK, if one accepts that there are risks to Roth money, what does one do? A Roth is still one of the best places to avoid taxes: Contribute to a Roth without paying taxes and withdraw from a Roth without paying taxes. What's not to like about that? (And if you have to ask me how does one contribute to a Roth without paying taxes, then you are still working.)

Please enlighten me........I'm not working and I don't know how you contribute to Roth w/o paying taxes..........

[sengsational]

If they do make a play for a consumption tax, to be fair (they like to use the word "fair" when talking consumption tax for some unexplained reason), they would need to include a rebate based on the proportion of Roth withdrawal. RothWD/(RothWD + income). So if that formula was 1, you'd get back all the VAT you paid during the year. If it was .5, you'd get back half, for instance.

With the a above, plus complete elimination of the personal income tax, I'd support it, but this will never happen.

[Texas Proud]

Quote:

Originally Posted by LOL! OK, if one accepts that there are risks to Roth money, what does one do? A Roth is still one of the best places to avoid taxes: Contribute to a Roth without paying taxes and withdraw from a Roth without paying taxes. What's not to like about that? (And if you have to ask me how does one contribute to a Roth without paying taxes, then you are still working.)

Yea, that is one of the things that I was taught back in college when I was taking tax courses... specifically estate planning...

The prof said that you have to do the planning with the laws that were in place at the time... if the laws change, well, sometimes you are stuck with your decision, sometimes you can change...

The thing you do not do is plan for a law that does not exist....

[pb4uski]

+1 If things change then there may be a need to respond but to try to tax plan based on intuition of what will be is a fool's errand.

[Options]

Quote:

Originally Posted by pb4uski Also, since Congress tends to make tax changes prospectively and not retrospectively, if it seemed that there were going to be changes adverse to my interests I could just empty my Roths and put the money in my taxable accounts.

Quote:

Originally Posted by pb4uski +1 If things change then there may be a need to respond but to try to tax plan based on intuition of what will be is a fool's errand.

These.

[MasterBlaster]

Quote:

Originally Posted by LOL! OK, if one accepts that there are risks to Roth money, what does one do? A Roth is still one of the best places to avoid taxes: Contribute to a Roth without paying taxes and withdraw from a Roth without paying taxes. What's not to like about that? (And if you have to ask me how does one contribute to a Roth without paying taxes, then you are still working.)

What to do

I would re-consider any Roth conversions going forward unless your marginal tax bracket for the conversion is really low.


If you have a choice of a (normal) tax-deferred 401k or a Roth 401k choose the tax-deferred option (unless your marginal tax bracket is really low).

[swakyaby]

Quote:

Originally Posted by mpeirce +1 The other threat to a ROTH is some sort of consumption tax. I doubt they'll call it a VAT, but a national sales tax applied to certain products (carbon tax anyone?) is another way to raise taxes. I actually support a consumption tax, IFF we eliminated the income tax. The real danger is adding consumption taxes while keeping the income tax.

I would be pretty upset if, after a lifetime of paying high income taxes, I retire and now must pay high consumption taxes instead of personal income tax.

[sengsational]

You and me both. That's why they'd have to include a rebate for any Roth funds withdrawn.

[Chuckanut]

The problem with these predictions about taxing Roth withdrawals, means testing SS, etc. is that they raise the FUD factor (fear, uncertainty, doubt). Thus, some people choose to do nothing but savings accounts and CD's paying a low rate. That's worse, IMHO, than paying additional tax in the future because one's investments have done well.

[Greencheese]

I could see the government ending Roth 401K and Aftertax rollovers instead of ending the Roth entirely.

[samclem]

Quote:

Originally Posted by Texas Proud The thing you do not do is plan for a law that does not exist....

I wouldn't optimize my plan for a law that didn't exist. But neither should one optimize exclusively for existing laws, ignoring any potential that they could change. I don't see anything wrong with arranging things so that, no matter if the laws change or not, that there is sufficient flexibility to respond. If there are several potential "futures", I'd rather have "70%" answers for all of them than have a perfect plan if nothing changes, but be in the hurt locker if the laws are modified.

[meierlde]

I expect that Roths will get RMD's very soon, and secondly since no taxes are due, when Inherited a roth pays out immediatly all be it the life insurance industry would object, as then the Roth could become a form of Life Insurance.