The Coming Tax Increases...

[MasterBlaster]

Serious tax question without meaning to cast aspersions on anyone:

For folks suggesting that Roths, for example, might lose some of their tax exempt status in the coming years or decades, are there examples from recent U.S. tax law history that suggest the government might take away favorable tax treatment of these type accounts. In other words, if one were to act in reliance on the promise from the government that a certain account type (or other long-term, non-revocable money decision) would be tax exempt/tax favored going forward, has one been disappointed by the government changing their position after the fact? Have promises been broken?

There is historical precident for taxation of "excess" IRA distributions. Before 1997 if you took more than what was deemed to be a "reasonable" amount out of your IRA, then you were hit up for an extra 15% excise tax. This was on top of any income taxes owed on that amount.

So something along those lines is certainly possible for a Roth IRA. Keep that in mind as you do your lifetime planning. Perhaps the concept of several independent accounts or streams of income is the way to go for tax diversity.

 

[samclem]

In fact I kinda suspect that any discussion of higher capital gains tax rates, or elimination of preferential treatment for capital gains, might tank the market.

I think it will have an effect, but perhaps not a big one. For example, over the next few years I may sell some MFs and pay the cap gains tax rather than wait until after 2010 and pay tax at the "regular income" rate when I sell. However, after I sell those MFs I'm likely to just repurchase the same ones (effectively just re-setting the basis through this action). If people do this, it shouldn't have an appreciable impact on share prices. They have to buy something with the money they get when they sell, right?

Still, raising the effective tax rate on equities (by eliminating the favorable tax rate on cap gains) will make them less attractive investments, which will drive down their prices somewhat.

 

[bpp3]

Have promises been broken?

I'm drawing blanks right now.

There are no promises when it comes to taxes or Congress. Congress has even been known to pass retroactive tax hikes, with the full blessing of the Supreme Court when it has been challenged.

If they need money, they will find a way to get it.