I see a lot of folks on this NG who keep talking about converting their IRAs to Roth IRAs touting the Roth being tax free on the back end as one of the big reasons to do this. The problem is that the Roth isn't really tax free, it's Tax DEFERRED - at least for the moment. It is SUPPOSED to be tax free when you take the money out in retirement, but if you break the rules it implodes.
We also need to keep in mind that to get into the Roth we FIRST have to pay
taxes on the money going in - whether its on current contributions or
conversions, the tax has to be paid. It is only the GAINS that come out
later with some tax benefit.
But here's the wild card - how certain are we, considering the current
economy, the financial crush that the states are under (with California
issuing IOUs instead of refunds, with Alabama defaulting on 529 prepaid
college plans, and with the continued and constant expansion of the Feds)
that Congress won't change its mind and decide they now need to tax the
earnings from Roth accounts?
After, this is what's happened to Social Security Benefits - there were not
taxed from inception (1936?) until 1981, less than 50 years. Also, rental
income was never subject to S/E tax, but they're considering that now -
along with a special Medicare tax on investment and portfolio income and a
special tax on the sale of a home.
So while we like to THINK that the money is a Roth is tax free, it is really
only tax deferred. If it gets removed early or if the rules change then it
won't be tax free.
Personally and professionally, I fully expect Congress to reverse direction
(they need way more money then they have now and the don't seem interested
in doing anything to stop the bleeding) and tax the growth in Roth IRAs. In
fact, I predict that eventually Roths will get the same treatment as today's
nondeductible traditional IRAs - taxed on the growth as its removed. I
don't know exactly when this will happen but I expect it will be in the next
10 to 15 years, perhaps sooner.
The only folks who'll get tax free money from a Roth are the one's taking it
Gene E. Utterback, EA, RFC, ABA
- posted 9 years ago