We talk a lot about the benefits of a Roth IRA. Every once in a while, though, we get some variation of this question: could Congress make the Roth taxable?
Believe it or not – despite the fantastic features that a Roth IRA offers – some folks don’t think it’s a good idea to open one. Why? They think that Congress may someday repeal the Roth. And, if that does come to pass, anyone who has a Roth IRA will have to pay taxes on their assets when they withdraw them.
Many experts agree that this scenario is possible. Yet most agree it’s unlikely, for a couple of reasons.
The first is that repealing the Roth IRA wouldn’t be a good political move. The largest voter body in the U.S. is over age 60. That also happens to be the same group who would bear the brunt of the tax impact of a Roth repeal. Most financial experts predict that older voters would push out any politician who endorsed this.
The second reason is economics. Retirement plans (including the Roth IRA) are the most popular vehicle through which Americans invest. And investing supports economic growth. If Congress repealed the tax-free withdrawal benefit of the Roth IRA, fewer people would be motivated to invest. In turn, this could potentially decelerate economic growth – which is the last thing the government wants.
You may be wondering if the Roth IRA we know today will continue to have the same benefits in the future. Truthfully, that’s anyone’s guess. Here are some potential changes that could happen to the Roth:
1. RMD at age 70 ½
At the moment, one of the biggest benefits of the Roth IRA is that – unlike traditional IRAs and 401(k) plans – there is no minimum distribution requirement. This may not always be the case, though. It’s possible that Congress could require Roth owners to take minimum distributions once they reach age 70 ½.
2. Discontinuing the Stretch IRA
A stretch IRA isn’t actually an IRA at all. It’s a strategy that allows certain beneficiaries to “stretch” inherited IRA assets over their lifetime. But Congress may not always allow this. If the rules were to change, it’s possible that all beneficiaries would have to withdraw inherited Roth assets within a certain period of time.
3. Putting a cap on Roth contributions once your account exceeds a certain amount
Right now, there is nothing that prevents Roth account owners from contributing to their account (as long as they fall within the earnings guidelines). However, in the future, Congress could potentially put the kibosh on further contributions by Roth owners whose accounts have more than $3.4 million.
4. Blocking “back-door” Roth conversions
Folks who make over a certain amount aren’t eligible to contribute to a Roth IRA. Right now, though, there’s a loophole that allows high earners to get around that rule. They may contribute to a traditional IRA (which has no income limits). Then, they can convert their traditional IRA to a Roth IRA. This is called a back-door Roth conversion. Now, anyone who does this must pay taxes on the money that they move into the Roth. But the conversion can be done incrementally over many years to lessen the tax impact. Admittedly, the back-door Roth conversion is sort of like an open secret. Eventually, however, Congress may say “enough is enough” and close the loophole.
Of course, all of these possibilities remain mere speculation for now. Even with potential glitches, we still think that the Roth IRA is beneficial for most people. If you think you’ll be in a higher tax bracket after you retire, the Roth is an even more attractive option.
If you’d like more information about how a Roth may fit into your retirement planning strategy, click here to schedule a no-cost, no-obligation meeting with a financial advisor.