The Darker Side of the Roth IRA

The Roth IRA is a brand new individual retirement account into which you put after-tax money and from which you receive totally tax-free distributions. Several articles in past newsletters have dealt with the Roth IRA. We have tried to describe the advantages of rolling over an existing IRA or a qualified retirement plan into the Roth IRA. We have also told you about the advantage of contributing to a Roth IRA on an annual basis. But there may be a darker side to Roth IRAs. Here are some troublesome questions regarding the Roth IRA.

1. Why did Congress make the Roth IRA inaccessible to individuals or couples with income exceeding $100,000? If the primary reason that Congress enacted the Roth IRA was to generate current tax revenue, then why exclude the very taxpayers who would pay the most taxes on their rollovers? Why does this windfall appear to be aimed at the middle class? These are the very people who are less likely to be able to afford to pay the taxes on their IRA rollovers with money outside of their IRA.

2. Is the Roth IRA rollover timed to coincide with a change to a flat tax system? Under this scenario, taxpayers would pay tax on their IRA rollovers at rates of 28%, 31%, 36% or worse only to find out that the flat tax rates of the future will be 17%. Will a flat tax replace our current system? Probably not, but it could happen.

3. Will the distributions from a Roth IRA always be tax free? I have to grin when I think of my own grandchildren in Congress scratching their heads and saying, “What�s up with this Roth IRA? No taxes on all of those investment earnings? I think Alzheimer’s was setting in early. Let�s correct this goofy error by taxing (only) 50% of the earnings and then we�ll sneak the rates up to 85% when they�re not looking.” I make a reference here to the fact that social security was not taxable until recently. Then Congress began taxing 50% of social security benefits on taxpayers whose incomes exceeded certain limits. The maximum percentage of social security benefits that are currently taxable is 85%. Makes you wonder.

Our conclusion is that for those who are at or near retirement, and who meet the income requirements, the Roth IRA presents a good opportunity. For younger taxpayers who cannot deduct their IRA contributions because they are covered by an employer plan, the Roth IRA contribution makes very good sense. But never fool yourself into thinking that this great deal will last forever. The longer you hold onto your Roth IRA, the greater the likelihood that the laws will change.