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Anyone have any thoughts on the future of ROTH IRA's? Will the "tax-free earnings" characteristic of them continue? I know once upon a time SS income was tax free, and then subsequently changed. Does anyone else know of any examples? The reason I ask, is because I have money in an old 403b. I kept it in my old employer's plan 1) because it was Vanguard, and 2.) because of the protection they had against bankruptcy, lawsuits etc. But now that ROTH IRA's have been accorded the same level of protection, I wonder if I should now rollover to a ROTH. My income will surely rise over the next few years by 5-fold or more and my current tax liability is low. Should I do it?
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Best advice is to make judgments based on today's knowledge, not tomorrow's perception/possibilities.

FWIW, 30 years from now, with all that money sitting in Roth IRA's being untaxed, there will be a big push for a national sales tax.

JLC
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with all that money sitting in Roth IRA's being untaxed, there will be a big push for a national sales tax.

I'm cynical, but that's why I think there is a push to eliminate restrictions on ROTH conversions based on income... To get a lot of people to choose to pay the taxes before the start a migration towards a sales tax.

-Joe
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The only certainty is that tax laws change. I believe that anyone who thinks a Roth IRA is going to be cash-free when they cash out in 30 or 40 years is living in a dream world. If you're going to retire in 10 years, probably change won't come that quickly.

My gut says that a tax break taken today (traditional IRA) is better than a tax break you may -- or may not -- get decades from now. Your gut may speak differently.
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However, if you're covered by a retirement plan at work, or if your income is high enough, you can't deduct contributions to a traditional IRA. In that case, a Roth IRA at least has the *chance* to be better for you than a nondeductible traditional IRA. And in the short run it is definitely better since any withdrawals come from contributions first, instead of being a mix of contributions and earnings.
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Author: stardustangel | Date: 4/10/05 7:13 PM | Number: 45544
Anyone have any thoughts on the future of ROTH IRA's? Will the "tax-free earnings" characteristic of them continue? I know once upon a time SS income was tax free, and then subsequently changed. Does anyone else know of any examples? The reason I ask, is because I have money in an old 403b. I kept it in my old employer's plan 1) because it was Vanguard, and 2.) because of the protection they had against bankruptcy, lawsuits etc. But now that ROTH IRA's have been accorded the same level of protection, I wonder if I should now rollover to a ROTH. My income will surely rise over the next few years by 5-fold or more and my current tax liability is low. Should I do it?

Historically, there are two things we know about tax laws: 1) They constantly change, and 2) There is always a 'grandfather' arrangement. I think this applies to the Roth IRA.

I believe that they may eventually tax money coming out of a ROTH IRA, probably subject to 'means testing', but I don't think they will ever tax the money that was put into them prior to such a change in the tax law.

If they changed the rules for money that was already in the ROTH, it would be tantamount to changing the coupon payment on a treasury note after you already owned it. It would be essentially breaking a contract that is backed by the full faith and credit of the US government. But, that doesn't affect changing the coupon for new issues, just like it doesn't affect changing the rules for new money added to an IRA after a change is made. It would just be another flavor of 'qualified' and 'unqualified' money.

So, I think putting money into a Roth IRA is extremely safe and a really good deal for most people. Whether it would be advisable for you to convert a 401(k) to a Roth depends entirely on your personal situation; ie, your current tax rate, your future tax rate, and your tax rate in retirement. There are many sites which offer Roth Conversion Analyzers that will tell you whether it would be better for you to convert or not (based on today's laws).

Russ
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Historically, there are two things we know about tax laws: 1) They constantly change, and 2) There is always a 'grandfather' arrangement. I think this applies to the Roth IRA.

I don't think the second is true. I would have to do some research but I invested in a pretax annuity in the late 70's because it was the only option available at the university where I worked. The original deal was that the money could be withdrawn with only the taxes due. By the early 80's, there was a 10% penalty imposed and there was no grandfathering as far as I know.

rad
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I would have to do some research but I invested in a pretax annuity in the late 70's because it was the only option available at the university where I worked. The original deal was that the money could be withdrawn with only the taxes due. By the early 80's, there was a 10% penalty imposed and there was no grandfathering as far as I know.

I am not fully aware of the specific product you are talking about, but I think it was an insurance product that took advantage of a tax loop-hole. The government plugged the hole, and later defined an official retirement vehicle - the IRA.

I think that all of the current annuity products are less secure from tax changes than IRAs.

I don't think you will find any government defined vehicle where grandfathering has not been observed.

Russ
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I don't think you will find any government defined vehicle where grandfathering has not been observed.

Is this true for the taxing of social security benefits ?

rad

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>> Is this true for the taxing of social security benefits ? <<

No, but it's not an individual retirement savings plan -- it's a Ponzi scheme.

#29
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Well that comes down to perceptions.

Is social security a type of investment account, where you put your contributions in, they earn interest, and then you get it back later?

Or is it a social entitlement program, where everybody pays taxes to support it and eventually some people (who according to the government's regulations qualify) receive it?
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No, but it's not an individual retirement savings plan -- it's a Ponzi scheme.


I'll just go with the straightforward -

Don't count on grandfathering to not pay taxes on whatever. How's that ? :)

rad
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rkmacdonald:

stardustangel; <<<<Anyone have any thoughts on the future of ROTH IRA's? Will the "tax-free earnings" characteristic of them continue? I know once upon a time SS income was tax free, and then subsequently changed. Does anyone else know of any examples? The reason I ask, is because I have money in an old 403b. I kept it in my old employer's plan 1) because it was Vanguard, and 2.) because of the protection they had against bankruptcy, lawsuits etc. But now that ROTH IRA's have been accorded the same level of protection, I wonder if I should now rollover to a ROTH. My income will surely rise over the next few years by 5-fold or more and my current tax liability is low. Should I do it?>>>>

"Historically, there are two things we know about tax laws: 1) They constantly change, and 2) There is always a 'grandfather' arrangement. I think this applies to the Roth IRA."

I am not sure that 2 is always true.

"I believe that they may eventually tax money coming out of a ROTH IRA, probably subject to 'means testing', but I don't think they will ever tax the money that was put into them prior to such a change in the tax law."

I have often thought, and posted, that I anticipate that a future Congress will revise the IRA rules and that Roth IRAs will be taxed like non-deductible traditional IRAs. The contributions were taxed, so that established basis, but the gains were never taxed, and could be taxed upon withdrawal, using the already existing allocation rules regarding basis in a traditional IRA.

"If they changed the rules for money that was already in the ROTH, it would be tantamount to changing the coupon payment on a treasury note after you already owned it. It would be essentially breaking a contract that is backed by the full faith and credit of the US government. But, that doesn't affect changing the coupon for new issues, just like it doesn't affect changing the rules for new money added to an IRA after a change is made. It would just be another flavor of 'qualified' and 'unqualified' money."

I do not believe that the change I outlined in my prior paragraph would fail Constitutional muster.

Also, I believe that Roth withdrawals will (if they do not already)count as incmoe for purposes of taxing SS benefits and/or means testing for SS benefits.

In addition, a change to a national sales tax, like FairTax or anything similar, would essentially tax Roth IRA funds when spent.

As a result, I agree with Russ that "putting money into a Roth IRA is . . . a really good deal for most people" whoare eligible.

Just my $0.02. Regards, JAFO


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Anyone have any thoughts on the future of ROTH IRA's? Will the "tax-free earnings" characteristic of them continue? I know once upon a time SS income was tax free, and then subsequently changed. Does anyone else know of any examples? The reason I ask, is because I have money in an old 403b. I kept it in my old employer's plan 1) because it was Vanguard, and 2.) because of the protection they had against bankruptcy, lawsuits etc. But now that ROTH IRA's have been accorded the same level of protection, I wonder if I should now rollover to a ROTH. My income will surely rise over the next few years by 5-fold or more and my current tax liability is low. Should I do it?
-----------------------

The "Tax Guide For Investors" by the Fairmark Press people speaks to some of your thoughts/comments on whether to rollover your 403b to a Roth IRA or not and also has a section (Bottom of page) that speculates on the future of the Roth IRA:

http://www.fairmark.com/rothira/decide.htm

Regards,
Bill



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Author: JAFO31 | Date: 4/11/05 1:22 PM | Number: 45562
I have often thought, and posted, that I anticipate that a future Congress will revise the IRA rules and that Roth IRAs will be taxed like non-deductible traditional IRAs. The contributions were taxed, so that established basis, but the gains were never taxed, and could be taxed upon withdrawal, using the already existing allocation rules regarding basis in a traditional IRA.

In a traditional Roth most people get to take a tax deduction for the money contributed. In a Roth you paid all the tax up front. If all things are equal, the total return for a Roth, will equal the total return for a deductable Traditional IRA. If the gains were to be later taxed in a Roth, the Roth would end up having far less total return than a TIRA. I can't see that happening.

I doubt very much that they will ever change the withdrawal rules for existing Roth IRAs. They may decide to eliminate the Roth at some point, but that would not affect existing Roths.

I do not believe that the change I outlined in my prior paragraph would fail Constitutional muster.

I do! Check out the way the documents that established the Roth are worded. They are clearly a contract with the government the same as a savings bond.

IRAs are nothing like the social security system, which never made any sense to me from the day it was established. The social security system is not a contract with the government and is not written like one. You are guaranteed nothing under the social security system. That's one reason I favor self directed social security accounts. If they are established, they will probably be guaranteed by some form of a contract like IRAs.

I agree that income from IRAs will likely be used for means testing towards social security.

There are so many other (legal) ways for the government to extract money from us, I just can't see them taxing Roth withdrawals.

Russ
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I do not believe that the change I outlined in my prior paragraph would fail Constitutional muster.JAFO

I do! Check out the way the documents that established the Roth are worded. They are clearly a contract with the government the same as a savings bond RKM

There are so many other (legal) ways for the government to extract money from us, I just can't see them taxing Roth withdrawals.


This is excatly why they will never be able to simplify the tax code. Too many lines and circles drawn around snd between this guy and that guy in every kind of situation, all these various magical kinds of money, income, assets, and accounts that cannot be taxed.

THAT is why the tax code is complicated (of course it goes way beyond IRAs)It's not because of the number of tax brackets
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In a traditional Roth most people get to take a tax deduction for the money contributed.


I think Russ meant

In a traditional IRA most people get to take a tax deduction for the money contributed.
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Or is it a social entitlement program, where everybody pays taxes to support it and eventually some people (who according to the government's regulations qualify) receive it?

'Qualifying' isn't so difficult, you simply have to be alive at the age of 65 (or 67 as the case may be)--that would be 'most' people, not 'some' people, wouldn't it?

2old




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Author: jrr7 | Date: 4/11/05 8:37 PM | Number: 45569

I think Russ meant

In a traditional IRA most people get to take a tax deduction for the money contributed.

Yes! It was a typo. Thanks jrr7 for catching it!

Russ
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Author: JLC | Date: 4/10/05 8:35 PM | Number: 45547
FWIW, 30 years from now, with all that money sitting in Roth IRA's being untaxed, there will be a big push for a national sales tax.

I'm not sure what you mean by this. Taxes have already been paid on the money in Roth IRAs. Only the gains have not been taxed, and gains are also not taxed in Traditional IRAs, 401(k)s, annuities, 403(b)s, thrift plans, and several other plans.

If you have been following any of the debate on capital hill about a national sales tax (to replace the Fed Income Tax), you will already know that one of the main stumbling blocks to it is the large (and growing) amount of money in Roth IRAs. This is because income taxes have already been paid on that money, and it would be unfair to have to pay an additional national sales tax with that same money.

I think this issue alone will be enough to prevent a national sales tax from ever replacing the income tax.

Russ
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"'Qualifying' isn't so difficult, you simply have to be alive at the age of 65 (or 67 as the case may be)--that would be 'most' people, not 'some' people, wouldn't it?"

Hi 2old,

Last I knew, one has to have 40 quarters work credit paying SS taxes to get the minimum payment and above that is based on the highest 35 years. So there may be some who are not eligible.

Regards, Ken
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Author: pekinrobin | Date: 4/11/05 9:49 AM | Number: 45551
My gut says that a tax break taken today (traditional IRA) is better than a tax break you may -- or may not -- get decades from now. Your gut may speak differently.

Why does everyone think there is so much extra tax-free money with a Roth IRA?

The money in a Roth IRA is after-tax money. The tax has already been paid on that money. It's not tax-free.

In the final analysis, there really is very little difference between the total return of a Roth IRA and a Traditional IRA. In fact, if the tax rate were to remain the same during work and retirement, they would be identical.

The only advantage a Roth IRA has is that you may be in a lower tax bracket after you retire. And, since Roth IRAs are not available to high income earners, the chances are that your tax bracket in retirement will be very similar to your tax bracket while working.

Russ
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Last I knew, one has to have 40 quarters work credit paying SS taxes to get the minimum payment and above that is based on the highest 35 years.

Hi Ken,

Yes, that's true, but there are a number of exceptions to the above, for example, spouses (both current and divorced) who have never worked can collect 50% of their working spouse's benefits, each child can collect 50% up to age 18, and some full-time students age 18-19 can collect 50%. Also, currently non-working disabled can collect the equivalent of their full retirement benefits prior to retirement age. My point was simply that the vast majority collect SS in one form or another--IOW, 'most' people collect, not merely 'some' (as the OP suggested).

2old

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rkmacdonald:

JAFO31: <<<<I have often thought, and posted, that I anticipate that a future Congress will revise the IRA rules and that Roth IRAs will be taxed like non-deductible traditional IRAs. The contributions were taxed, so that established basis, but the gains were never taxed, and could be taxed upon withdrawal, using the already existing allocation rules regarding basis in a traditional IRA.>>>>

"In a traditional Roth most people get to take a tax deduction for the money contributed."

And what about those who do not get a current deduction? You are essentially ignoring what I wrote (so I added a bold emphasis when quoting my original post), to write about something else.

"In a Roth you paid all the tax up front."

Only under the current rules.

"If all things are equal, the total return for a Roth, will equal the total return for a deductable Traditional IRA. If the gains were to be later taxed in a Roth, the Roth would end up having far less total return than a TIRA. I can't see that happening."

It would be no worse than a non-deductible TIRA.

<<<I do not believe that the change I outlined in my prior paragraph would fail Constitutional muster.>>>

"I do! Check out the way the documents that established the Roth are worded."

That would be the Internal Revenue Code.

"They are clearly a contract with the government the same as a savings bond."

THe IRC is not a contract with the government. Do you remember when the deduction for personal interest was phased out? Or when state sales tax was made non-deductible (even though it is now potentially deductible again)?

Regards, JAFO

Regards, JAFO
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Author: JAFO31 | Date: 4/12/05 11:15 AM | Number: 45579
THe IRC is not a contract with the government. Do you remember when the deduction for personal interest was phased out? Or when state sales tax was made non-deductible (even though it is now potentially deductible again)?

That was totally different situation. Of course they can change the rules at any time for new money going into something.

They cannot change the rules if it affects money invested a government vehicle based on an arrangement(ie, a contract). IRA = Individual Retirement Arrangement.

Russ
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rkmacdonald:

JAFO31: <<<<The IRC is not a contract with the government. Do you remember when the deduction for personal interest was phased out? Or when state sales tax was made non-deductible (even though it is now potentially deductible again)?>>>>

"That was totally different situation. Of course they can change the rules at any time for new money going into something."

It was not different. I had a long-term personal loan that was deductible when I made the borrow decision and then it was not deductible. Poof. Even though my loan did not change and predated the change in the tax laws. No ultimate grandfathering, but there was a 4-year transition.

"They cannot change the rules if it affects money invested a government vehicle based on an arrangement(ie, a contract). IRA = Individual Retirement Arrangement."

Except the government is not the trustee of most/all the IRAs or 401-Ks; The mooney is invested with Vanguard, Fidelity, TIAA, or ScottTrade, etc. and is not necessarily invested in a government issued instrument at all. An IRA is not directly an investment, it is essentially a blackbox permitted by the IRA to hold investments.

If you doubt what I am saying, wait a week (past April 15th, they are al kind of busy now) and then ask the resident pros on the Tax board for their respective opinions.

I guess most will say it is unlikely, but I doubt that you will find many that would say it is actually prohibited.

Regards, JAFO

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"My point was simply that the vast majority collect SS in one form or another--IOW, 'most' people collect, not merely 'some' (as the OP suggested)."

Hi 2old,

Yeah, there are a few... for anyone interested here are some old numbers... Dec 2002... Lots of other graphs to check out...

http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2003/ff2003.html

"Income of the Aged Population:
Beneficiaries in Current-Payment Status, December 2002

More than 46 million beneficiaries were in current-payment status, that is, they were being paid a benefit. The majority of those beneficiaries (63%) were retired workers and 12% were disabled workers. The remaining 25% were spouses, children, survivors, or dependents of retired or disabled workers.

Beneficiary.....................................Number
....................................................(thousands).....Percent

Total..................................................46,444.........100
Retired workers and dependents........32,348..........70
Workers............................................29,190..........63
Spouses and children...........................3,158............7
Disabled workers and dependents.......7,221..........16
Workers.............................................5,544..........12
Spouses and children..........................1,677............4
Survivors of deceased workers...........6,875..........15"

Also:"Reliance on Social Security, 2001

In 2001, 91% of married couples and nonmarried persons (aged 65 or older) received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 65% of aged beneficiaries, and it was the only source of income for 20%."
(My emphasis)

My apologies for all the periods, I tried the < pre > & wordpad but it refused to cooperate... ah I think I should have been using Notepad.. too lazy to redo it... next time.

Regards, Ken (Soon to be amongst the "Retired workers"...)
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No, but it's not an individual retirement savings plan -- it's a Ponzi scheme.
Do you really know what Mrs. Ponzi had done?
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Hi Ken, thanks for the link and info. I visited the link and here are some interesting numbers:

Total New Awards

Retired Workers 63% 42%
Spouses & children of retired workers 7% 10%
Survivors of deceased workers 15% 20%
Disabled workers 12% 17%
Spouses & children of disabled workers 4% 11%

It's interesting that for 'new awards' of SS benefits, the four categories that have increased greatly are disabled workers, dependents of disabled workers, survivors of deceased workers, and spouses and children of retired workers.

These numbers appear to tell an interesting tale.

It seems intuitive that survivors of deceased workers should increase as more individuals (particularly women) live to ripe old ages. The reasons for the other increases are not as clear—why has the # of disabled workers risen when we now have less 'risky' jobs (i.e. more office jobs, less manual labor jobs)? According to all the hype, we're supposed to be in better health now, if this is the case, why are so many disabled?

At the same time as the percentage of retired workers has decreased, there's been a 3% increase in spouses & children of retired workers--What accounts for this? A higher divorce rate, i.e. more spouses and their children are entitled to benefits? Men are fathering more children during their later years?
(Geez guys, lay off those little blue pills ;-)

2old
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RookieJoe,
What's the basis for your statement that there's a push to eliminate restrictions on Roth conversions based on income?
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