We talk a lot about the benefits of a Roth IRA. But when talking about risks, one variation of this question often comes up: could Congress make the Roth taxable?
Despite the significant benefits that a Roth IRA offers, some people think it’s a good idea to open one because they think Congress may change the tax status of Roth IRA accounts. If that does come to pass, anyone who has a Roth IRA will have to pay taxes on their assets when they withdraw them.
While this scenario is possible, for now it remains 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 If Congress repealed the tax-free withdrawal benefit of the Roth IRA, fewer people would be motivated to invest.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.
However, one IRA benefit was already recently removed. The SECURE Act, enacted in December of 2019, eliminated the “stretch IRA” strategy that allowed IRAs to be passed onto heirs tax free.
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Here are some other potential changes that could be made to the Roth:
1. Required Minimum Distributions
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 a certain age.
2. 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.
3. 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 called the “back-door conversion” that allows high earners to get around that rule. They may contribute to a traditional IRA, which has no income limits, and then convert this traditional IRA to a Roth IRA. 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.
The back-door Roth conversion is sort of like an open secret. Eventually, Congress could say “enough is enough” and close the loophole.
All of these possibilities remain mere speculation. But even with potential risks, the Roth IRA is still has a lot to offer. To see if you could benefit from opening a Roth or any other retirement planning strategy, request a no-cost, no-obligation meeting with a financial advisor today.