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Vanguard 'Greatly Concerned' Over Changes Like Congress' Proposed Cap On 401(k) Plans
Someone gonna paid for the massive cut on their tax burden. This is a slap on the face for those who are responsible for planning their retirement. There is also discussion the Roth IRAs may be subject to taxation upon withdraw at later days.
They don't care how much we save, they just want us to pay the taxes if we want the services. I think the richer you are the more you like user fees over taxes.
@Sven - I guess I disagree about Roth taxation. I think they will figure a way to make all investments after-tax with tax-free dividends and capital gains.
I'm thinking that sometime in the future Roth withdrawals will be taxed once contribution principal has been removed. So, if you invested 100k in the form of contributions in your Roth, through the years, the first 100k taken will not be taxed; but the investment gains after contributions will be taxed when removed or some form of this. This one of the reasons I never opened a Roth account in the first place.
If and when the government needs money ... Hello, taxation.
My "Crystal Cube" when polled gave the "yes" answer ten out of ten times.
@Sven - I guess I disagree about Roth taxation. I think they will figure a way to make all investments after-tax with tax-free dividends and capital gains.
@Anna, At present Roth IRAs are funded by after-tax dollars and thus are tax-free upon withdrawal. What I am saying that there was discussion that would tax Roth IRA at later days and that is called double taxation. Obama administration floated that idea but back down quickly when it was released to the press.
Short summary - I haven't been able to find any Obama Roth IRA taxation proposal that would amount to double taxation. Further, the most obvious way of taxing Roths - making the earnings (but not contributions) taxable - would neither amount to double taxation nor be feasible to implement in any case.
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Obama floated a lot of ideas regarding IRAs, but I'm having a real problem finding any proposal that wold amount to double taxation of Roth IRAs (i.e. taxation of money in (as is done now) and taxation of the same money (not its earnings) on the way out.
Taxing the earnings would simply make the Roth look like a nondeductible IRA, which no one says is double taxation. A scheme like that would be, IMHO, virtually impossible to implement. That's because taxpayers typically discard records of Roth contributions (and conversions after the five year waiting period is up). So they can't identify what part of a Roth distribution constitutes earnings. In contrast, when you make a nondeductible IRA contribution, you file a Form 8606, and each year after that carry over the information into the current year's tax filing.
Getting back to whether Obama ever proposed double taxing Roths. The best I've been able to find is this statement suggesting that Obama's proposed cap of 28% on the tax benefit (exclusion from income or tax deduction) would result in double taxation. The page notes that this was a new proposal for for FY2017 (2016), i.e. for Obama's last budget. http://www.pension-specialists.com/hottopics/0216Obama.pdf (item #1)
Under this proposal as described, if you contributed to a traditional IRA, and you were in the 33% tax bracket, you'd pay 5% (33% minus 28%) on your "deductible" contribution, and as the "streamlined" summary appears to read, also pay income tax when you withdrew that contribution. But that's for a traditional IRA, not a Roth.
Further, the government proposal anticipated this problem and addressed it. Here's the full set of FY2017 (2016) proposals:
On pp. 153-154 (pdf pp. 164-165) you'll find the proposal in question. It says that "If a deduction or exclusion for contributions to retirement plans or IRAs is limited by this proposal, then the taxpayer’s basis will be adjusted to reflect the additional tax imposed."
In other words, instead of treating the money coming out as having a zero basis, the cost would be increased (on paper) so that the taxpayer doesn't pay that extra 5% a second time. Part of the contribution would be treated as a nondeductible contribution (which is what it really would be).
I don't see this proposal affecting Roths at all, but given the special handling of traditional IRAs to ensure there's no double taxation, it seems highly unlikely that the same issue wouldn't be addressed, assuming that Roths are even covered by the proposal.
In general, if I were 30-40 years from retirement I’d prefer to use a pre-tax program like the Traditional IRA. At 10 years from retirement I’d begin transitioning (through Roth contributions and/or conversions). At 60+ I very much like the Roth concept. So these considerations affect my view of the anticipated change (not favorably).
Reason: I have no confidence in being able to anticipate the rules of the road as Congress, the executive branch and federal courts may define them 65-75 years from now (anticipating 35-40 years of making contributions and 30-35 years of withdrawing money. The “promise” of tax exempt contributions exists now. Use it. The promise of tax exempt withdrawals in 75 years is anybody’s guess. I do, however, have a somewhat higher predictive confidence for 20-30 years out. So for a shorter time frame like that, I’ll take my chances transitioning to a Roth-type product.
Memory is a funny thing, especially with politicians. Who knows what the federal budget, tax collection needs and political mood of the nation will be so far out? For some perspective - 75 years ago (1942): Pearl Harbor had just been attacked, FDR was President, the interstate highway system hadn’t yet been built, and the setting for one of my favorite films was taking shape along Nantucket Beach (BTW - not the actual filming location).
Comments
@Sven - I guess I disagree about Roth taxation. I think they will figure a way to make all investments after-tax with tax-free dividends and capital gains.
My crystal ball says whether it's this administration or the next or the next after that, rules around taxation on retirement savings will change...
p.s, I also asked my magic 8-ball this exact question and it said "yes" 3 out of 4 times.
If and when the government needs money ... Hello, taxation.
My "Crystal Cube" when polled gave the "yes" answer ten out of ten times.
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Obama floated a lot of ideas regarding IRAs, but I'm having a real problem finding any proposal that wold amount to double taxation of Roth IRAs (i.e. taxation of money in (as is done now) and taxation of the same money (not its earnings) on the way out.
Taxing the earnings would simply make the Roth look like a nondeductible IRA, which no one says is double taxation. A scheme like that would be, IMHO, virtually impossible to implement. That's because taxpayers typically discard records of Roth contributions (and conversions after the five year waiting period is up). So they can't identify what part of a Roth distribution constitutes earnings. In contrast, when you make a nondeductible IRA contribution, you file a Form 8606, and each year after that carry over the information into the current year's tax filing.
Getting back to whether Obama ever proposed double taxing Roths. The best I've been able to find is this statement suggesting that Obama's proposed cap of 28% on the tax benefit (exclusion from income or tax deduction) would result in double taxation. The page notes that this was a new proposal for for FY2017 (2016), i.e. for Obama's last budget.
http://www.pension-specialists.com/hottopics/0216Obama.pdf (item #1)
Under this proposal as described, if you contributed to a traditional IRA, and you were in the 33% tax bracket, you'd pay 5% (33% minus 28%) on your "deductible" contribution, and as the "streamlined" summary appears to read, also pay income tax when you withdrew that contribution. But that's for a traditional IRA, not a Roth.
Further, the government proposal anticipated this problem and addressed it. Here's the full set of FY2017 (2016) proposals:
https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf
On pp. 153-154 (pdf pp. 164-165) you'll find the proposal in question. It says that "If a deduction or exclusion for contributions to retirement plans or IRAs is limited by this proposal, then the taxpayer’s basis will be adjusted to reflect the additional tax imposed."
In other words, instead of treating the money coming out as having a zero basis, the cost would be increased (on paper) so that the taxpayer doesn't pay that extra 5% a second time. Part of the contribution would be treated as a nondeductible contribution (which is what it really would be).
I don't see this proposal affecting Roths at all, but given the special handling of traditional IRAs to ensure there's no double taxation, it seems highly unlikely that the same issue wouldn't be addressed, assuming that Roths are even covered by the proposal.
Reason: I have no confidence in being able to anticipate the rules of the road as Congress, the executive branch and federal courts may define them 65-75 years from now (anticipating 35-40 years of making contributions and 30-35 years of withdrawing money. The “promise” of tax exempt contributions exists now. Use it. The promise of tax exempt withdrawals in 75 years is anybody’s guess. I do, however, have a somewhat higher predictive confidence for 20-30 years out. So for a shorter time frame like that, I’ll take my chances transitioning to a Roth-type product.
Memory is a funny thing, especially with politicians. Who knows what the federal budget, tax collection needs and political mood of the nation will be so far out? For some perspective - 75 years ago (1942): Pearl Harbor had just been attacked, FDR was President, the interstate highway system hadn’t yet been built, and the setting for one of my favorite films was taking shape along Nantucket Beach (BTW - not the actual filming location).