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Subject:  Re: Roth vs SS Date:  3/30/1998  1:14 PM
Author:  KATinChicagoland Number:  2512 of 100110

<<Joe Varga wrote>>
Does anyone know whether when the time comes to make tax free withdrawals from your Roth IRA (after 59.5 yrs etc), the Roth gains will be added back into your taxable income when determining the taxable portion of Social Security benefits. As it stands now all pensions, tax free bonds, regular (deductible ) IRA amounts are added back for the social security calculation. It seems inevitable that that will be the case for gains on Roth IRAs as well and if that is the case, then Roth IRAs will be taxed after all (via the SS calculation). And it adds another level of complexity to the Roth vs non-Roth question.

<<Pixy replied>>
I don't know for sure how it will be brought back in, but it almost certainly will be because the earnings will be unearned income. The IRS will have to develop some formula to separate the return of contributions (already taxed) from a withdrawal of earnings (untaxed and "unearned"). And, yes, it is another consideration albeit IMHO a minor one.

<<my comment>>
As to current law the answer is clear: tax-free withdrawals from Roth IRAs do *not* affect the taxation of social security benefits. The rules are very specific as to the types of tax-exempt income that are included in the calculation of tax on social security payments, and distributions from Roth IRAs are not included.

I interpret Pixy's remark as a comment on the likelihood of a future change in the law (which would come from Congress, not the IRS). As such it's a reasonable opinion, but one that I disagree with. Congress has made no attempt to have the provision on taxation of social security benefits cover all types of exempt income, so the mere fact that Roth IRAs will produce exempt income does not mean there is a gap in the law. My guess is that Congress will not choose to impose this indirect tax on Roth IRAs, although I wouldn't bet the house either way.

KAT in Chicagoland
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