Roth IRA / Inflation protected bonds --can they be (il)legally taxed later?

I think the answer is "yes", but I would like to start a discussion whether a Roth IRA may be later taxed by the US government and whether bonds (I bonds, TIPs, etc) may be retroactively taxed later.
The thesis is that the US government will have to tax and inflate the money supply in the next 50 years due to budget constraints.
Reading the below, I don't see any serious obsticle to the US government passing a law saying Roth IRAs are 'illegal' and subject to tax (that is, make a Roth into a regular IRA) and likewise saying that inflation protected bonds are no longer covered by an inflation premium (that is, abolishing them when inflation becomes too high, and/or too many people hold such bonds).
Any thoughts?
Of course the solution is to own gold, but that's another post.
RL
http://www.gold-eagle.com/editorials_03/holloway013003.html
http://caselaw.lp.findlaw.com/data/constitution/article01/56.html
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Ray, certainly any law Congress has passed subsequently can be (legally) thrown out. This includes the statutes that provide for the tax breaks of IRAs. But I personally do not think Congress will eliminate the tax advantages of currently held Roth IRAs, because (1) this hits retirees too hard and so is counterproductive given that one concern is that Social Security will have to be curbed; (2) of the effect this would have on the trust of the American people; (3) Congress has other means of dealing with Social Security, Medicare, the national debt etc. that would be less detrimental to people's trust; and (4) considering how poorly Americans save, I doubt taxing the gains in Roth accounts would make much of a dent in the aforementioned national problem areas.
I think your best bet is to google on and study the subject of how to deal with the latter costs. I have never seen serious discussion of eliminating the tax advantage of Roth IRAs. What I see more often are solutions like raising the SS age; increasing tax rates in general; etc.
Either way, as I imagine you know, like any investment plan, there is a certain amount of "guessing" involved here. All one can do is gather opinions and information, as you are doing now, act rationally upon them, and hope for the best. Here in my late 40s, I am piling as much into my Roth IRA as I possibly can.
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raylopez99 wrote:

That article seems to suggest just the opposite, as it states in conclusion "Gold ownership and its usage to avoid the ravages of inflation and currency devaluation now stands as a privilege that can be revoked at any time by new legislation".
John Cowart
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raylopez99 wrote:

Ray, Personally I think if Roth IRAs are ever taxed it wouldn't be directly but in back-door ways. For example a Roth distribution might be added back into your income when deciding whether you qualify to take certain tax deductions, or when calculating AMT, or who knows what. The effect would be higher taxes without actually taxing a Roth distribution.
But I don't think a full repeal of the Roth IRA provisions is likely. I can't think of any recent tax law that simply did away with an established shelter like that (closing loopholes, yes, but eliminating a qualified account, no). And US tax history suggests there would be some grandfathering of existing accounts even if something was changed.
I also don't see why Roths would be singled out as a source of revenue, even if the premise is true (that US needs to raise revenue in future). There are some whoppers out there, such as the mortgage interest deduction, or change to the Social Security tax salary cap, that with small adjustments could result in very large increases in tax collections, without a full about-face on tax law.
Similarly I doubt the US would stop inflation adjustments on I-bonds, which would in effect be a default on US debt. A more likely narrative, which arguably already happens, is through policy making sure the inflation index rises at a slower rate. This is a way to reduce the cost of inflation-indexed debt as well as the rise in Social Security benefits.
Last you mentioned gold & one of your links pointed to a gold-related site. My opinion is that any goldbug analysis should be treated the same way as, say, a rant from some guy who sits down on a park bench next to you and starts chattering about black helicopters and being wiretapped at home. He might be right, but he might be insane, and it's hard to tell the difference!
-Tad
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Tad Borek wrote:

Yes, just like tax-exempt interest on muni bonds indirectly increases the amount of taxable Soc Sec. benefits and reduces itemized deductions subject to AGI limits. I would never consider a "promise" that 30 years from now I will be able to withdraw my money "tax free" as a sacrosanct one. Didn't politicians also once say that Soc. Security would never be taxed?

Absolutely, especially given how much unqualified mortgage interest is undoubtedly being deducted in error these days. I recall reading somewhere that in the next year or two, any home mortgage refinance that involves over a certain amount of cash out would trigger a reporting requirement to the IRS by the lender. That alone would certainly raise more taxes without changing any laws at all. Similarly, just think how much property tax is being deducted which is actually for non-deductible capital improvements (sewers, etc) or services.
-Mark Bole
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wrote:

I worry about this. While I have no problem with eligible savers making modest contributions to a Roth as part of an overall program, conversions of traditional IRAs (where we pay a boatload of unnecessary taxes now, reducing our working nest egg in the process) is another matter.
I can't think of any other situation that requires substantial up front payments where I would not insist on some type of guarantees. Especially when dealing with something as mercurial as the tax code.
-HW "Skip" Weldon Columbia, SC
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What about the creation of the whole passive income/passive loss stuff back in 1986, which as I understand it hosed all sorts of real-estate-based tax shelters without any grandfathering?
--
Rich Carreiro snipped-for-privacy@animato.arlington.ma.us


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Thanks for the replies; a great thread and I look forward to any other insights from you guys, who seem to know a lot more than I do on this subject.
For the record, a book that predicts an inflation tax is "The Coming Generational Storm" by Laurence J. Kotlikoff and Scott Burns (2004). Burns was the Dallas Morning News financial guy and Kotlikoff is a Republican policy wonk and professor who had developed a program (see http://www.esplanner.com/ ) to do Monte Carlo simulation to see how much retirement money you need and what withdrawal rate (typically 3%) you can spend it, and not outlive your retirement money. (T Rowe Price also has an online version, but not as detailed.
Kotlikoff predicts the inflation tax soon, as Boomers retire, since already the indirect costs of Social Security and Medicare (SS&M) (and other federal obligations) is something like over $150000 per person. He also points out that 66% of Americans, now and in the future, will depend on SS&M for over 50% of their retirement. And having worked on the hill he doubts SS&M reform is politically feasible. According to Kotlikoff, though the details were vague, waiting until later to fix SS&M is not feasible since the interest payments will begin to grow exponentially. (I am following up reading another book now, taking the opposite argument--that the aging population is not a problem--called Aging Nation: The Economics and Politics of Growing Older in America By: James H. Schulz, Robert H. Binstock)
K&B's proposed solution is to buy unhedged foreign bond funds (a play on shorting the dollar), mentioning BEGBX and RBIBX, to buy a energy fund (XLE, IYE, IGE, IXC or VGENX), to buy gold mining stocks or mutual funds (FSAGX, BGEIX, VGPMX), to buy an international stock fund (VGTSX), to punt on China (he could not find a decent China index fund as of 2004 when the book is written--I agree, and note, like Jeremy Siegal has said, sometimes the hottest stock/region is the worst performing--I doubt China stocks will really fly, unlike the country China--but as a last resort mentions the China fund FHXCX and CHN), and to invest in keeping old people alive with pharma (VGHCX).
RL
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raylopez99 wrote:

What's an inflation tax? What are the indirect costs of SS&M?

Are they suggesting that individuals should buy these funds or that the Social Security surplus should be invested in these funds? If the former, then how does this help with SS&M and inflation taxes?
-Will
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Heck, the Chief of the GAO said similar just a couple of weeks ago. See http://apnews.myway.com/article/20061028/D8L1OC5G0.html
Along the lines of what you wrote subsequently, Jeremy Siegel's latest book _The Future for Investors_ expresses similar concerns and counsels putting way more into international stocks than he has in the past, since he expects the U.S. to be hit hard by baby boomers retiring and so not being as interested in buying stocks, resulting in reduced demand, lowering stock prices.
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Tax laws are fickle. One of the retirement planning issues is living off of investment income. Gains tax went down 1977, up in 1986, down in 1994. Dividend taxes decreased in 2004. So this "yo-yo" means you cant put all your bets on one tax strategy.
P.S. It is amusing to observe which political party was the president when these tax changes occurred. Two of the tax cuts were Dems, the third a Repub and the tax increse a Repub. So you cant even predict tax strategy by political party.
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