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TC001 wrote:
<< Finally, the alternate tax method arguement about some type of consumption tax is thrown in. Once again, does this make a Roth IRA distribution better or does it really argue against the Roth? With a national sales tax, when you buy a television nobody is going to ask if it's being paid for with Roth funds, thereby making it free from tax :) >>

Pixy replied:
<<Not just the Roth is involved here. ALL savings will be affected. Those of us who tried to save will be hit the worst because instead of spending it all early, we tried to put some aside for when it really counted. In a traditional IRA, you'll get hit as well, so if that occurs, who wins besides Uncle Sam?>>

The affect of a switch from income tax to consumption
tax affects traditional IRAs, ROTH IRAs and after tax
savings differently. Lets assume a switch to consumption
taxes with no increase in Government spending, so the
consumption tax replaces the income tax dollar for dollar.
---
Taxable investments fair best with the change.
Under current law they are taxed when earned, as they
grow and finally when capital gains are relized at the end..
Under a consumption tax they get to compound tax free,
but are taxed when spent. Over 10 years or more the extra
tax free compounding more than makes up for any possible difference between the existing capital gains rate and the consumption tax rate. With less than 10 years you
probably have time to take evasive action.

The earlier the change is made the better they fair, since a
switch to consumption tax allows them the compound
tax free, which is an unexpected 'windfall'.
----
Deductable IRAs (and 401(k)s) come out unscathed. The money was not taxed when earned, will not be taxed at
withdrawal and will be taxed when spent. It's only taxed
once as 'promised'. The tIRA is treated fairly and as expected.

Non-deductable IRAs are taxed when earned and when
spent. They are taxed twice, which may not be fair but it
is expected.

It's been argued that the IRA is tied up in an
'underperforming' account and would perform better
as a taxable investment. Unless you speculate on
margin, short sales or collectables, an IRA can be
invested anywhere. The only underperformance is
due to the custodial fee, this can be as little as $10,
a trivial amount for a $10,000+ account..
---
ROTH IRAs get hammered. A switch to consumtion
tax means they get taxed twice, when earned and when
spent. This is both unexpected and unfair.

I can't remember who said it first but:
"An old tax is a fair tax." The congress critters should stop
grandstanding.
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