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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.

Joe Varga
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Greetings, Joe Varga, and welcome.

<<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.>>

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.

Regards…..Pixy
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<<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
http://www.fairmark.com
Tax Guide for Investors
Now with expanded and revised
Roth IRA information

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KAT,

<<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.>>

Color me more of a pessimist. I always believe the worst of Congress.

And BTW....Now that I've got a lawyer skilled in taxes reading this board, I'll have to be far more careful what and how I write. <g>

Regards……Pixy


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KAT wrote:
<<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.>>

Pixy and KAT:
None of the calculations of ROTH v. Deductible IRA that I've seen take any account of the fact that taxable IRA income affects the taxation of SS income and phase out of deductions, while under current law ROTH withdrawals do not. In effect the calculations assume that the changes Pixy suggests might occur actually will occur.

If Pixy's speculation is correct you should still use the ROTH if the calculations come out that way. If current law prevails the ROTH has another advantage. Further if Pixy is correct the most likely change will be to simply add the ROTH withdrawal to AGI. This still favors the ROTH because it adds the after tax amount, rather than the larger pretax withdrawal from the deductible IRA.
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Vtaeger,

<<If Pixy's speculation is correct you should still use the ROTH if the calculations come out that way. If current law prevails the ROTH has another advantage. Further if Pixy is correct the most likely change will be to simply add the ROTH withdrawal to AGI. This still favors the ROTH because it adds the after tax amount, rather than the larger pretax withdrawal from the deductible IRA.>>

Assuming that's the way it shakes out, you're correct. As to the lack of inclusion of a possible taxation of SS in various projections, that is something I've seen only in the more sophisticated models not generally available to the online audience. For those with incomes approaching that potential, though, it is something that should be cranked into a comparison equation.

Regards…..Pixy
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<<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.

Joe Varga>>

We don't know yet, of course. I agree that this is a very real possibility. We had a bit of a shouting match (figuratively) a few weeks ago here, when I said that converting a regular IRA to a Roth IRA was probably a bad idea for most people. Lots of people get real hostile when you burst their happy dream-bubble.

To paraphrase from Wayne's World: "Sure, the government might not change the rules and put a tax on a Roth IRA. And monkeys might fly out of my ass."

Ray
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>>>We had a bit of a shouting match (figuratively) a few weeks ago here, when I said that converting a regular IRA to a Roth IRA was probably a bad idea for most people. Lots of people get real hostile when you burst their happy dream-bubble.<<<

Now, now Ray.... settle down. There is a difference between bursting happy dream-bubbles and putting forth questionable information.

>>>To paraphrase from Wayne's World: "Sure, the government might not change the rules and put a tax on a Roth IRA. And monkeys might fly out of my ass."<<<

Ah! Now it's a virtual certainty, eh?

Wishing I could borrow your crystal ball to help with my stock selection....

orangeblood
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<<<<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.>>

Color me more of a pessimist. I always believe the worst of Congress.>>

Thinking over back the last few years, I seem to recall congressmen like Gephart, Kennedy, etc. demagoging about "tax cuts for the rich" and "tax cuts to people who don't even want them" (yeah, right, like _anybody_ would say "Please don't cut my taxes."). Seems to me that they included the "imputed rental value" of your house as part of your income, to determine if you were "rich".

Given these facts, I can easily see some politician pounding the table about "tax-free money kept by those evil, greedy people who saved for their retirement", and "they have lots of money that they never paid taxes on, so vote for me and I'll make them pay taxes so that I can give you some goodies."

Regards,
Ray
"Sometimes it's not paranoia. Sometimes they really _are_ out to get you!"

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<<Given these facts, I can easily see some politician pounding the table about "tax-free money kept by
those evil, greedy people who saved for their retirement", and "they have lots of money that they
never paid taxes on, so vote for me and I'll make them pay taxes so that I can give you some
goodies.">>

I'm with you, Ray. While these things are new (and small), Congress will leave them alone except for some technical clarification.

But wait until a few hundred thousand evil rich people start drawing out millions tax-free. I can see it now: "My bill is about fairness. If the workin' man must pay taxes on his income...the income which he can barely feed his family on...then these fat cats should pay their fair share!"

As always, a pessimist concerning Congress,

Shealy
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<"Sometimes it's not paranoia. Sometimes they really _are_ out to get you!">

Even the paranoid have enemies (or politicians trying to "help" them).
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<<While these things are new (and small), Congress will leave them alone except for some technical clarification.

But wait until a few hundred thousand evil rich people start drawing out millions tax-free. I can see it now: "My bill is about fairness. If the workin' man must pay taxes on his income...the income which he can barely feed his family on...then these fat cats should pay their fair share!">>

But, when Congress takes the taxes I pay *now* on the money I put into my Roth and invests them in something like the FF, then when it's time for me to withdraw my tax-free money they'll have made enough to cover the taxes I would otherwise be paying at that time, right?

Oh, sorry, April Fool's Day was Wednesday...

Piz
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