Are you afraid that the tax system will be changed to VAT, making a Roth a bad deal?

[swampwiz]

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?

 

[rescueme]

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 ...

 

[travelover]

I think high inflation is more likely, as raising taxes takes congressional courage.

 

[Lazarus]

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!

 

[Dawg52]

More likely there will be a VAT and Income tax!

I was thinking the same thing.

 

[donheff]

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.

 

[ziggy29]

It concerns me, but there's little I can do beyond hedging my bets.

 

[Dogtrack]

If the fed went VAT only, wouldn't it need to be like 25%?

 

[Rustic23]

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.

 

[loves2read]

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.

 

[Independent]

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.

 

[Nords]

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...

 

[loves2read]

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).

 

[samclem]

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.

 

[youbet]

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.

 

[Leonidas]

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.

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

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.

 

[youbet]

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........

 

[growing_older]

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.

 

[ziggy29]

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.

 

[MichaelB]

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.

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

Anyone who tells you different is selling something.

 

[samclem]

I don't see how this reduces the benefit of a Roth in any way.

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).

 

[mickeyd]

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?

Hmmm, ask me again in mid-November. By that time, I should have enough info to make a comment.

 

[Animorph]

If the VAT is added to but does not replace income taxes, then we may miss out avoiding increasing income taxes we might expect now. But if income taxes remain equivalent to what's in place now, then Roth will do its job OK.

If VAT replaces income taxes, then I would expect (hope?) there would be a form to fill out where you indicate Roth funds withdrawn, and stuff bought, in order to receive at least a partial rebate of VAT you paid. This would be similar to what you can do in England and Canada, as a US citizen, to receive a refund of VAT on stuff you bought. Common enough now, so it shouldn't be too hard to implement for Roth funds.

I'm not terribly afraid of using the Roth, but I do have somewhat of a balance between taxable, traditional IRA/401k, and Roth accounts. Can't do much more than that right now.

 

[charlie]

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.

Thanks and Cheers,

charlie

 

[donheff]

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.

Thanks and Cheers,

charlie

You would pay more - the VAT. But if FIT remains the same or higher you would both that and the VAT on the 401K. The ROTH would still be advantaged - relatively.