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I've on and off wondered how "safe" Roth accounts are and things like this anti-Roth screed in the LATimes and this blog post at the Atlantic talking about the sad fiscal shape of the US has me wondering again.

While I don't think that Congress will be able to get away with directly taxing qualified Roth withdrawals, I've more and more thought that we're going to end up seeing stuff like qualified Roth withdrawals being included in the taxability-of-SS-benefits calculation or becoming an AMT preference item or maybe even the repealed-in-1997 excess accumulation tax on IRAs returning and applying to Roth IRA distributions in excess of some amount.

Now, certainly if your trad IRA contribution is going to be non-deductible then making a Roth contribution (or tIRA contribution followed by immediate conversion if your income doesn't allow the full Roth contribution) is pretty much a no-brainer.

But in other cases, especially if you are in the 25% federal bracket or higher, what do you think? Better to at least get the certain bird in hand (the current-year tax deduction)? Or pay the taxes now figuring rates will be higher later but that the fisc won't be so bad that Rothees will be screwed by stuff like above? Where do you see it going?

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    "Where do you see it going?" type of questions are open-ended & subjective. – Chris W. Rea Apr 12 '11 at 14:00
  • You concern is valid. I've written briefly about government take over of retirement accounts here: (edfriendly.blogspot.com/2010/12/government-take-over-of.html) – Muro Apr 12 '11 at 14:25
  • Perhaps this is naive, but wouldn't the government implement changes like your example with a grandfather clause (only new money would fall under new rules)? Otherwise people who invested their retirement money with certain expectations would get pretty angry.... – M. Dudley Apr 13 '11 at 2:08
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    I think the votes to close on this question are ridiculous. If you're planning for the future, answers to this is a consideration for someone to make when they develop their retirement savings savings. If you vote against this question, you should vote to close ANY question asking for opinions about particular investments, etc. – duffbeer703 Apr 14 '11 at 0:52
  • @emddudley - when the rules for certain kinds of rental real estate losses changed in 1986 there was no grandfathering. People who made investments with the expectations they'd be able to deduct losses were rudely surprised when the passive loss concept was created and eliminated (well, deferred) the ability to take those losses. – QuantumMechanic Apr 14 '11 at 21:12
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Congress isn't likely to just take away your IRA's tax-advantaged status entirely; it would be political suicide, like touching the third rail of Social Security. So putting money into a Roth IRA is likely still better tax-wise than putting it in a non-retirement account, even if it's possible that you will eventually have to pay some taxes on it. It's possible that even if the rules are changed, contributions you have already made would be grandfathered (i.e., new rules would apply to new contributions), as is common when government changes the rules on a program already in effect. The question is which will be better for you in the future, traditional or Roth, and there's simply no way to know.

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I think that things could go one of two ways - I think that Roth IRAs could become a scapegoat, like in the LA Times piece, and Congress Republicans will be willing to throw Roth owners under a bus.

The more likely scenario, in my opinion, is that Congress and Americans will realize that Social Security is unsustainable, and IRAs will become an example of a program that works to alleviate that problem.

Either way, I think that we will probably see some changes to IRAs, but I am sticking with a Roth for now, and hoping for the best.

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Some people think I'm nuts, but I'd rather price in a known quantity like the tax savings now from a IRA/401k contribution instead of a potential tax savings later. Also, left-wing types consider people who can make lots of retirement contributions "rich", so I think you need to at least discount the future value of tax-free withdrawls.

The fact that really rich people are using the conversion loopholes to shift money from various retirement funds into Roths doesn't add much to my faith in the process.

I personally put about 20% of my retirement savings into a Roth account, because I'm basically out of readily available options to make deductible contributions.

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