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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Re: To convert or not to convert? Date: 8/16/1998 4:51 PM
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To my post regarding Roth IRAs, Piz replies (in part):

The recordkeeping argument against future taxation of Roths doesn't hold up. Withdrawals from traditional IRAs are taxed as income - why wouldn't Roths be taxed the same way? No need to establish a basis at all.

Sorry, but there's no way anyone can convince me that Roths aren't going to get screwed one way or another in the future.


I reply:

Obviously you (and other skeptics/realists) may be right about the ultimate result, but I still believe that the recordkeeping argument holds up. Contributions to traditional IRAs often are made with pre-tax money, so the basis is often $0. In this case, it makes sense to tax withdrawals in full. (Whether they should be taxed as ordinary income, rather than capital gains, is an entirely different policy question.) When after-tax money is used to fund a traditional IRA, Infernal Revenue requires you to determine your basis and tell them, using Form 8606. In other words, the required recordkeeping is built into current law.

The Roth IRA, on the other hand, is funded with after-tax money, so if it is ever taxed, what logic the tax code possesses (and my original retroactivity argument) virtually requires the taxpayer to be credited with those contributions as a basis. Yet under current tax law, unless the taxpayer withdraws money for non-qualified purposes (and my understanding is that there are none after age 59 1/2), there is no reason to maintain those records because no taxes are due. --Bob
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