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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121572  
Subject: Hedging Bets Away From Roth Investing Date: 1/5/2008 10:50 AM
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Greetings all,

With the recent news of Mike Huckabee winning the Iowa Republican Primary, it may behoove us to consider contributing to a Traditional IRA rather than a Roth IRA in the future. The reason I say this is that Huckabee expressly supports the "FairTax" plan (http://www.fairtax.org/) which would basically eliminate income/payroll taxes and institute a universal 23% sales tax. Such a consumption tax would be very bad for those like me who have their tax-advantaged retirement savings strictly in a Roth, as income taxes were already paid and we would still be paying the consumption tax after we withdraw money from our roth. Those with pre-tax money in a Traditional IRA would never have to pay income taxes on that money, and would be left with much more spending power.

I'm getting increasingly worried about keeping money in a Roth, as I'm only 23 and there is lots of time for something such as this plan to kill any tax advantage I might gain from investing in a Roth. The reason I like the Roth is that I expect to be in a higher tax bracket after I retire than I currently am in as a grad student. Is anybody else considering splitting contributions in the future between a Traditional IRA and Roth IRA for this, or a similar, reason?

Thoughts?

Best,
X

(Cross-posted to Retirement Investing Board)
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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97641 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 11:59 AM
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I'm not changing anything based on the showing of one candidate in one primary.

rad

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97644 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 12:37 PM
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I'm not changing anything based on the showing of one candidate in one primary.
rad


An excellent point, and looking over what I read, I may have overstated the influence on this particular primary showing on my point. The Iowa primaries simply served as an example and got me thinking about how much things could change with regard to tax laws in the 40 years before my retirement. I'd be interested to hear what others are doing to safeguard themselves against possible changes based on the whims of future congresses or other elected officials, if anything. Of course, by virtue of being unknown future changes, it's impossible to say what the best strategies are, but diversifying a bit within different kinds of tax-advantaged accounts seems to me to be a reasonable course of action. I think that the FairTax movement serves as a great example of how drastically things could change, and the idea of a shift to a consumption tax seems to be becoming more mainstream.

~X

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Author: JeanDavid Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97646 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 1:07 PM
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With the recent news of Mike Huckabee winning the Iowa Republican Primary, it may behoove us to consider contributing to a Traditional IRA rather than a Roth IRA in the future. The reason I say this is that Huckabee expressly supports the "FairTax" plan (http://www.fairtax.org/) which would basically eliminate income/payroll taxes and institute a universal 23% sales tax. Such a consumption tax would be very bad for those like me who have their tax-advantaged retirement savings strictly in a Roth, as income taxes were already paid and we would still be paying the consumption tax after we withdraw money from our roth. Those with pre-tax money in a Traditional IRA would never have to pay income taxes on that money, and would be left with much more spending power.

Even if he wins the primary elections in enough states, and the presidential election later, remember that he could do nothing without the House and Senate passing a bill for his signature. What do you think the chances of that are?

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97647 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 1:10 PM
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Even if he won the presidency, unless he has the votes in Congress to ram this through -- which I doubt -- then there's not much he can do to bring it on.

#29

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Author: RingwraithV Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97648 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 1:21 PM
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Excluding the particulars of Huckabee, et al. on what might happen to the tax system, I would say this: you're 23 and the next 40 years are going to see all manner of changes, so I wouldn't sweat whether a Roth is better than a Trad IRA is better than a [insert financial vehicle here]

You're saving for retirement, that's what matters. That you are as young as you are probably means the Roth is the better option right now.

If you can figure out what the tax situation will be four decades hence, you won't have to worry about your IRA/Roth/etc. You'll be a billionaire many times over with that kind of prognostication skillset.

RingwraithV

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Author: wintbill Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97651 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/5/2008 8:53 PM
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I'm getting increasingly worried about keeping money in a Roth, as I'm only 23 and there is lots of time for something such as this plan to kill any tax advantage I might gain from investing in a Roth.

I believe it's not beyond the realm of impossibility that the Federal government could create a "rebate" form for all withdrawals from a Roth IRA in years where a flat consumption tax is assessed. So if you take a distribution out of your Roth IRA, your broker/fund company sends you a 1099-R-like form that you submit with this "rebate" form. Then you get a rebate of the consumption tax rate on your distribution (e.g. a rebate of 23% on a $4k Roth distribution).

After all, the 1040 and Schedule A are littered with similar deductions and credits. Why not a rebate form for your Roth?

Bill

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Author: draknor One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97675 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/8/2008 5:52 PM
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After all, the 1040 and Schedule A are littered with similar deductions and credits. Why not a rebate form for your Roth?

I don't know about everyone else, but if I had my druthers, I'd gladly accept the "penalty" of having paid income taxes on my Roth assets and then be taxed again on a consumption tax, if it meant not having to do income taxes & government paperwork every year. And my taxes aren't even that complicated -- but my goal for a revised tax system would be to take away all of this countless credits & deductions, and make the system simple and un-complicated. Not much chance of that happening within a government, but its fun to dream :-)

As far as my next 40 years -- diversify. I have a traditional 401(k), Roth 401(k), Roth IRA, and taxable accounts. I put money wherever I can, and by the time I need it some of it I'm sure one or more of this account types will be non-optimal, but I'll be okay with that. As they say, don't let the tax tail wag the investment dog!

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Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97741 of 121572
Subject: Re: Hedging Bets Away From Roth Investing Date: 1/12/2008 3:46 PM
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I think that the FairTax movement serves as a great example of how drastically things could change, and the idea of a shift to a consumption tax seems to be becoming more mainstream.

I can't see the FairTax ever going anywhere. First of all it is a 30% consumption tax, not 23%. They are using some impressive sophistry claiming it is 23% (because .3/1.3=.23, but the tax is still 30% on the cost of what you're buying).

Add to that the inability to give people with mortgage and kids a special tax benefit, or any of a hundred other tax breaks to favor special interests. I can't see congress ever going for something like this. It is just not going to happen.

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