Congress to change roth ira limits?
- Thread starter thehixx
- Start date
This sets off all kinds of warning bells for me.
A Roth IRA rollover promises investors a future tax benefits in exchange for a present tax liability. The only reason an investor would exercise their option to roll over their IRA is because the discounted value of the future benefit is greater than the present liability. So, allowing more people to roll over Roth IRAs will result in a net loss of tax revenue for the government.
But I don't think this was motivated by cutting taxes. This is about intertemporal cash flows. By moving tax receipts from the future to the present, the government is implicitly borrowing from investors without having to issue debt. Sneaky!
So, apart from the fact that we're stealing from the next generation, what's wrong with this picture?
The problem with a Roth IRA is that it's a promise from a politician. The more implicit, off-the-books government debt we have, the more today's politicians are giving tomorrow's politicans a very strong incentive to default. And since this debt isn't securitized, it's about as junior as you can get. Given the way our government's finances are going, you don't want to be the one holding the junior debt.
The government can reneg on a Roth IRA in a number of ways. If you don't believe me, here's a group called "Americans for Fair Taxation" and their their proposal:
http://www.fairtaxvolunteer.org/smart/faq-main.html#16
There's another cautionary tale in what's happening to Social Security benefits. Politicans know how to boil a frog: slowly.
My advice? Don't forget about political risk. Take your tax benefit where no politican can get their hands on it: up front, in a traditional IRA.
A Roth IRA is like telling a coke addict where you keep your stash before going on vacation for a month. Good luck.
Martin
A Roth IRA rollover promises investors a future tax benefits in exchange for a present tax liability. The only reason an investor would exercise their option to roll over their IRA is because the discounted value of the future benefit is greater than the present liability. So, allowing more people to roll over Roth IRAs will result in a net loss of tax revenue for the government.
But I don't think this was motivated by cutting taxes. This is about intertemporal cash flows. By moving tax receipts from the future to the present, the government is implicitly borrowing from investors without having to issue debt. Sneaky!
So, apart from the fact that we're stealing from the next generation, what's wrong with this picture?
The problem with a Roth IRA is that it's a promise from a politician. The more implicit, off-the-books government debt we have, the more today's politicians are giving tomorrow's politicans a very strong incentive to default. And since this debt isn't securitized, it's about as junior as you can get. Given the way our government's finances are going, you don't want to be the one holding the junior debt.
The government can reneg on a Roth IRA in a number of ways. If you don't believe me, here's a group called "Americans for Fair Taxation" and their their proposal:
http://www.fairtaxvolunteer.org/smart/faq-main.html#16
There's another cautionary tale in what's happening to Social Security benefits. Politicans know how to boil a frog: slowly.
My advice? Don't forget about political risk. Take your tax benefit where no politican can get their hands on it: up front, in a traditional IRA.
A Roth IRA is like telling a coke addict where you keep your stash before going on vacation for a month. Good luck.
Martin
Don't forget that traditional iras are taxed as regular income upon withdrawal. Right now that's around 40% max, but it could be 75% or 90% at the whim of the politicians. I'd rather take my chances with the Roth. I think it will be much easier to raise the tax rate on the traditional ira withdrawals than on the Roth, which was promised to be tax free growth.
I'm sure the politicians will try to screw us in the future, too. I just think the chances are LESS with a Roth.
I'm sure the politicians will try to screw us in the future, too. I just think the chances are LESS with a Roth.