As I see it, it makes a difference. When an individual makes a contribution to a Roth, he pays the tax on that income up front. If he makes a contribution to a deductible TIRA, he pays no tax on the income used to make the contribution when the money is invested, but must pay tax on the back end. The more that the later tax burden gets shifted from income taxes to consumption taxes, the more the individual with the TIRA benefits, and the more the person who paid taxes up front gets a worse deal relatively speaking (since now he'll pay tax again when he spends the money rather than having truly tax-free use of the funds).
Would somebody please provide an example showing that adding a VAT would not change the advantage of a ROTH assuming FIT rates remained
the same.
My tired old brain just does not understand how paying tax twice on the same money is not a bad thing.
Here's a niche.
We're in our late 40s and not withdrawing from our IRAs. Instead we're enjoying my pension income, a little rental income, more dividend income, and some of those rockin' long-term cap gains (offset by cap losses or by the cap gains zero-percent tax bracket). We're in the 15% tax bracket for now. We know when spouse hits age 60 and her pension begins that we'll be in the 25% tax bracket-- at least for as long as she's alive or until that bracket's tax rate rises. (I don't see it getting any lower.) When we have to start taking RMDs from conventional IRAs then we're going to pay taxes at the 25% rate before we even figure out what to do with the RMD addition to our checking account.
During our working years we were frequently above the income level that would allow Roth contributions, and we've almost never had a deductible contribution to a conventional IRA. So now that we're in the lowest tax bracket we're ever likely to see, we might as well convert the conventional IRAs to Roths.
If we convert then when we hit our 70s (and would have had to take RMDs from conventional IRAs) we won't have to touch our Roth IRAs. We could have donated our conventional IRAs to charity instead of taking an RMD, but with the Roths we have a choice-- leave it alone, take some out, or make a charitable donation.
Depending on the means testing for Social Security, not having to take an RMD might tax less of our SS. But admittedly this is a niche even in the niche. I think spouse's pension will drive our SS into max taxation.
As I understand a VAT, it's only taxed when you spend it. If we don't spend it then we won't pay tax on it. If we pay FIT on a conversion at 15% then we pay the lowest FIT that we're ever likely to see, and I don't think FIT will be swept away by a groundswell of VAT sentiment. We'll take our chances with VAT.
Again this might not make sense for 90% of ERs. But for those dual-working couples with two pensions and taxable portfolios in addition to IRAs, the VAT doesn't change the logic behind a Roth conversion.
