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As is well known, withdrawals from Roth IRA's and Roth 401(k)'s are tax-free when the requirements for tax-free withdrawals are met. But does the government have the authority to actually cancel that entire feature of these accounts, even accounts that have been open and funded for years? And if so, is there any way to safeguard against this?

Put simply, could the government do a bait-and-switch?
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As is well known, withdrawals from Roth IRA's and Roth 401(k)'s are tax-free when the requirements for tax-free withdrawals are met. But does the government have the authority to actually cancel that entire feature of these accounts, even accounts that have been open and funded for years? And if so, is there any way to safeguard against this?

Put simply, could the government do a bait-and-switch?



they absolutely Could --

whether they might depends on how much Brokers would stand to lose and how much uproar voters might cause.


recall, money that goes IN has already been taxed .. not likely they'll feel the need to double-tax.

they could just eliminate them /or they could try to tax gains.


MY guess is nothing changes for many years
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Congress could do whatever they want with taxes in the future, and will. I don't think you can do much to predict what they will do. You do have an impact on future government spending and taxes - it's called voting.

With two unnecessary wars the defense spending has gone from about $2500 per capita in 1998 to $4000 in 2010.

http://en.wikipedia.org/wiki/File:PerCapitaInflationAdjusted...

What else has increased by 60% over that period ? Not taxes to pay for it, that's for sure.

It is a given that we will have tax increases, the only question is what form they will take - older SS retirement age, increased ceiling on SS contributions, national sales tax, expiration of the wrong-headed Bush tax cuts, etc. None of them are going to be popular. Could Roth withdrawals be taxed in the future ? Maybe not federal and state income tax, since you have already paid it before contributing to the Roth plan, and it would be double taxation. But it's conceivable that new taxes would apply to earnings in the future.
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I obviously didn't read the chart I linked to very well. It is the whole budget that has increased . But defense taking a bigger chunk of it.
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Well let's see, at various times they have:

Changed depreciation schedules of rental investments and equipment.

Set limits on income for Roth's and TIRA's

Changed the ability to tax social security benefits based upon income and earnings

Changed the tax rates and limits many times

Changed the AMT requirements (whoops they promised that and didn't)

Made changes in the deductability of estates.

Changed the cap gains rates and holding periods

Of course they can change it.

Hockeypop
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But does the government have the authority to actually cancel that entire feature of these accounts, even accounts that have been open and funded for years?

Yes. Congress is pretty much free to change the laws as they see fit. The only limits (as far as I can tell) are they can't do anything unconstitutional, and they generally want to get re-elected.

And if so, is there any way to safeguard against this?

No. Well, except watch for whom you vote.

In many discussions on this topic over the years, the general consensus seems to be that if Congress does change the Roth IRA/401k taxation, they would probably either make the balance in the account on some date tax free, or they would exempt any previously taxed contributions and rollovers from a second tax when withdrawn. If they don't at least do the latter, they would be taxing some money twice. I don't know if that amounts to a law of attainder (which is unconstitutional), but I'd hate to have to argue that it isn't. And doing the former would at least give them some hope of re-election.

--Peter
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Of course they can change it.

Hockeypop


Very good, H!!
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It seems to me that one likely way to tax a Roth account is if Congress establishes a Value Added Tax. In that way when the proceeds of a Roth account are spent they will be taxed again. They get us "coming" (when we contribute pre-taxed assests to the Roth) and "going" (when we spend the proceeds taken out of the Roth). Tom
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does the government have the authority to actually cancel that entire feature of these accounts, even accounts that have been open and funded for years? And if so, is there any way to safeguard against this?

Yes.
No.

Look at what they did in the 1986(?) tax reform. Social Security payments became taxable. But your contributions into SS was with after-tax money, so the money that SS pays you should not be taxed since it was already taxed once.

All they have to do is change the law. Two votes in congress and one predential signing and it's done.
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Put simply, could the government do a bait-and-switch?

They do all the time.

The best thing to do is not put all your eggs in one basket. I've gotten there by default. I have a Roth 401k but a traditional IRA. A defined contribution pension plan and a regular brokerage account. I don't get the best possible current or future tax treatment but at the same time I won't be saddled with the worst when the rules change in the future.

JLC
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Look at what they did in the 1986(?) tax reform. Social Security payments became taxable. But your contributions into SS was with after-tax money, so the money that SS pays you should not be taxed since it was already taxed once.

The argument was that most of SS benefit hasn't been taxed. Yes, what the employee paid in was taxed. But the half the employer paid in was not. In addition, SS benefit for most people far exceeds the total paid in so they said the difference (accumulated investment income) should be taxed. You may not like it but there is some logic to it.
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>> Put simply, could the government do a bait-and-switch? <<

They could, but it's far more likely they would do something different.

They could eliminate the Roth concept at some point in the future so no additional funds could be added.

They could partially replace the federal income tax with a VAT or national sales tax and partially negate the Roth's current advantages.

But I strongly doubt they would directly "repeal" the deal in place for assets already in Roth vehicles.

#29
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I think cancellation of the entire plan is more than possible in the relatively near future, along with elimination of tax-free withdrawals for the so-called "rich," whatever level might be politically expedient at that point in time.
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Value Added Tax: It seems to me that one likely way to tax a Roth account is if Congress establishes a Value Added Tax. In that way when the proceeds of a Roth account are spent they will be taxed again. They get us "coming" (when we contribute pre-taxed assests to the Roth) and "going" (when we spend the proceeds taken out of the Roth). Tom


It is huge in Europe and Canada. Everybody is doing it. I am not sure how it works on retirement acounts in Europe/Canada. Maybe our Euro/Canucks can share.

RunTex
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Isn't a VAT just a sales tax? So if I withdraw funds from a Roth or my savings account and buy lunch in either case I pay the VAT/sales tax.

Also unless the income tax is eliminated, I fail to see how the addition of a VAT would have any effect on a Roth vs regular IRA. In either case the funds are subject to income tax (Roth before and regular IRA at withdraw).

In any event the issue tax rates can change. The state of Georgia can up the sales tax from 7% to 70% -- if I spend money I have to pay that. Congress can move the marginal rate from 15% to 5% or 55% -- if one has income one pays the tax.

Gordon
Atlanta
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>> Isn't a VAT just a sales tax? So if I withdraw funds from a Roth or my savings account and buy lunch in either case I pay the VAT/sales tax. <<

Yes, but if part of the income tax is replaced by a VAT, then you have lost some of the tax benefit you thought you were getting. If the VAT is merely in addition to existing income tax rates then you'd still be getting the deal you bargained for.

#29
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One feature of the Roth that I would expect to be eliminated is the ability for someone other than a spouse to inherit the Roth and keep the money in a Roth.

I'm not saying that it would be taxed; just that a final tax free withdrawal would have to be made when the money is sent to whoever inherits it.

This would eliminate the so call stretch Roth IRA.

Greg
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But the half the employer paid in was not.

Unless you're like myself and self employeed and then you pay both halfs and the taxes of both haves.

JLC
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>> Unless you're like myself and self employeed and then you pay both halfs and the taxes of both haves. <<

I believe the "second half" that a self-employed person pays is deductible from federal income tax, though.

#29
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I believe the "second half" that a self-employed person pays is deductible from federal income tax, though.

Yes, for those self-employed or partners of a partnership, 1/2 of SE tax is deductible on their personal 1040s above the line.

But to the OP's question: Congress can pass any law or repeal/ammend any existing law they wish, providing it does not violate the fundamental principals of the Constitution. For example, there are currently legal suits challanging the new Health law's requirement that all individuals must have health insurance by a certain date.

But it is highly unlikely that the promises of non-taxable Roth earnings upon a qualified withdrawal will be resended for Roth accumulated earnings. Not sure if such a law making accululated earnings ordinary income upon withdrawal could be challanged as unconstitutional, but from a practical standpoint, can you imagine the negative politics at reelection time for those legislators who voted to retroactively resend the Roth's tax free character? Whew!

However, indirect taxation is certainly in the cards, and I expect some forms of this to wiggle into our tax returns. For example, requiring the calculation for determining provisional income used in determining how much of one's Social Security is includable as ordinary income, may well be ammended to include the earnings portion of a qualified Roth withdrawal.

BruceM
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