Now for those non tax geeks out there, Traditional IRA's are deductible when you contribute but taxable when you pull the money out. Conversely, Roth's are not tax deductible but tax free on the back end.
For most of my clients, my advise has always been to take advantage of the tax breaks up front and not down the road. The risk of that strategy is that tax rates will probably be higher when we retire. However, in my thinking, higher rates should be more than offset by the taxpayer being in lower tax brackets at retirement.
In addition, one of the things I pose to clients on the Roth's is that I fully expect the government to give up on that tax free some day. Inevitably, my client will say "they just can't begin taxing what's supposed to be tax free..... can they?"
Well, here it comes..................
The Roth IRA is something close to motherhood, baseball, and apple pie among America's middle class. Thus it's a rather novel sensation to see someone named Gerald Scorse, who seems to be a left-leaning tax activist, takes to the pages of the LA Times to excoriate them.In a Roth, taxes are treated the other way around. There's no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There's no requirement that you make a minimum withdrawal -- after age 70 1/2, or ever.While this argument is rather novel, I doubt it will be unique. I'm less excited about Roth IRAs than most people who write about personal finance, and that's because over the years, I expect we're going to see a lot more op-eds like Scorse's. When I look at the budget problems we face, I'm skeptical that Congress is going to live up to its promise to keep its hands off that money. At the very least, I'd bet that high earners are going to see some sort of surtax on their Roth withdrawals.
All of which makes Roths a perfect "fiscal Frankenstein." In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.
For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they're a bit like toxic instruments on the nation's books. Worse, Congress has them on steroids, and President Obama wants to up the dosage.
The limit on annual Roth contributions has risen from $2,000 to $5,000. Persons over 50 can add another $1,000 to "catch up." That's a $6,000 per-year maximum, $12,000 for a married couple -- triple the original limits.
Actually, what I see happening is that there will be a day when Congress says any earning before a certain day will be grandfathered but all earnings after that will be taxed just like traditional IRA's.
But a government would never renege on a promise now...... would they?