Ed Slott: Why Roth IRAs Are Here To Stay

Ted

FYI: Retirement planners can relax on one point, according to IRA specialist Ed Slott: The Roth IRA is not going away.

Slott, an IRA consultant and president of Ed Slott and Company, told advisors at his 2019 Instant IRA Success workshop in Las Vegas on Saturday that he often hears investor concern about whether Roth accounts, where funds are contributed on an after-tax basis and are allowed to grow and be distributed tax-free, will lose their tax-advantaged status.
Regards,
Ted
https://www.fa-mag.com/news/ed-slott--why-roth-iras-are-probably-here-to-stay-43488.html?print

Gary

First impression - Lot of meaningless hot air. I'm sure he's going to keep the government from doing as they see fit with Roth IRA's. He is going to do this how?

"The government] said that it (SS) would be never be taxed, and look what they did."

msf

I agree with the conclusion, but with little else here. Slott plays to his crowd: the government is bad, the government is out to get you, the government lies.

Look at the quote Gary gave (gov said SS would never be taxed). Here's what SSA says about that:

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have "promised." It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program. ...

In 1983 Congress changed the law by specifically authorizing the taxation of Social Security benefits. This was part of the 1983 Amendments, and this law overrode the earlier administrative rulings from the Treasury Department.

I suspect Slott would be bringing up notch babies, except that nearly all of this part of his crowd has died off. (They'd be over 100 years old.)

He said that people who had already made Roth contributions would be grandfathered in. IMHO he's being too generous here. Previous contributions and previous earnings would be grandfathered in, but not people. Future earnings in Roths by people who already had Roths could be taxed easily.

The reasons why I believe that, and not what he described would be the worst case are twofold:

1 - Government honesty (seriously). Governments (federal, state, local) may individually tax the same income (e.g. fed and state tax the same W2 income), but a single government entity does not tax the same income twice. (The IRS may tax corp. earning and then tax dividends paid out of those earnings, but those are taxes levied on two different taxpayers, at two different levels.) Roth contributions have already been taxed as personal income; they will not be taxed again.

2 - Pragmatics. No one is required to maintain records of contributions or earnings in Roth IRAs (at least once the five year requirements have been met). So it would be difficult for the government to tax past earnings on contributions. It would be very easy for it to tax future earnings. Just change the law so that people (and financial institutions) are required to keep track of those earnings.

BennyB

Yes, the governmen t can reach out and touch someone anytime they want to.They do so with great alacrity.Are Roth IRAS safe?I wish it was so- BUT-- well, I guess well find out!!!

Gary

That quote I referenced was from Mr. Slott's presentation not mine or my thoughts. The goverment needs to tax the rich and remove the tax from SS. Just my 2 cents. That would be a good project for someone who wants to take it on??

Old_Joe

Wasn't the idea of the tax on SS in fact to tax the "rich"? If I recall the argument, many well-off people with large retirement incomes were (as usual) using loopholes to avoid taxes. Wasn't it the idea that people with lower retirement incomes would not hit the tax threshold for SS but people with the larger incomes would?

johnN

Best Ira maybe SEP- Ira if you have a small business or have 1099 incomes... I have one at Vanguard - it's great way to have tax sheltered acct to have for long term holdings because you save so much tax deferred to use for investing

Anyone have DEFINED BENEFITS plans added to their portfolio!?

AndyJ

Old_Joe said:

Wasn't the idea of the tax on SS in fact to tax the "rich"? If I recall the argument, many well-off people with large retirement incomes were (as usual) using loopholes to avoid taxes. Wasn't it the idea that people with lower retirement incomes would not hit the tax threshold for SS but people with the larger incomes would?

@Old_Joe, I don't remember the argument, but what you say about the actual tax computation is true. With lower income, much less of SS income is taxed; 2018 was a low income year for me, and ~ 15% is taxable, versus the usual ~ 85%.

Haven't heard this argument in a while, but I recall that in the past, at least, it was suggested that SS should be means tested ... and it is, via the income tax.

P.S., off topic: do you still have the place in the Russian R. valley? Another flood year there, I'm reading.

msf

johnN said:

Best Ira maybe SEP- Ira if you have a small business or have 1099 incomes... I have one at Vanguard - it's great way to have tax sheltered acct to have for long term holdings because you save so much tax deferred to use for investing

Anyone have DEFINED BENEFITS plans added to their portfolio!?

@johnN you asked this two weeks ago and I stated that "if the object is to maximize allowable contributions, the individual 401(k) is usually superior."
https://mutualfundobserver.com/discuss/discussion/47567/roth-ira-and-sep-ira-and-defined-benefits-questions

I'll try to be clearer. What are you trying to do with a DB plan? Usually someone looks at these only with high income and after one has maxed out DC options. For most people with self-employment income, they get a higher max with a 401(k) plan than with a SEP-IRA.

The SEP-IRA limit is lower until you hit $280K in net income. Even then, it's still lower if you qualify for a catch up contribution, which you can't do with a SEP.

So if you're trying to increase the amount you can defer, have you looked into a 401(k) instead of a SEP? If you're trying to create a "traditional" pension plan (which is what a DB plan is), have you considered simply annuitizing (part of) your DC plan instead? That's simpler than doing all the annual mortality and funding calculations for a DB plan.

Here's a calculator from Fidelity that will show you what you can contribute to a SEP vs a 401k plan.
https://scs.fidelity.com/products/mobile/sepMobile.shtml

Here's Fidelity's worksheet (with 2017 limits) that shows you what's behind the calculations:
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/401k-self-employed-owner-only-business.pdf

Another reason why a 401(k) plan is superior for some - unlike a SEP, it allows you to make Roth contributions. Vanguard finally added a Roth option to its individual 401(k). For many years, T. Rowe Price was the only one offering a no cost 401(k) with Roth option, which is why I used that. Fidelity's still doesn't have a Roth option.
https://investor.vanguard.com/small-business-retirement-plans/comparison

Old_Joe

@AndyJ- Hi Andy, and thanks for the concern. Yes, our place in Guerneville was isolated by the flood, but the living area is well above the water level, being some 20' up on concrete pylons. I was up there on Tuesday before the water came up, and the neighbors and I secured everything to the extent possible, and raised everything of value above the anticipated river crest. I'll be going back up on Sunday for a major session of hosing off stuff and general cleanup.

Thanks again- OJ

AndyJ

@OJ, sounds like you've been thru more than one flood there. Hope the cleanup chores aren't too extensive. Haven't been in that neighborhood in a long, long time, but that was and must still be such a beautiful valley.

Old_Joe

@AndyJ- Oh, yes... some 65 years and many floods. They were a lot more fun when I was a kid. The flood in '95 was the last straw for the old original house. We had to tear that one down and then built the new place. And yes, it's still beautiful: the view over the Russian River from our rear deck hasn't changed at all since I was a kid. Timeless. As long as there's no fire, that is.

Gary

Good referance:

"The 1983 Amendments
In the early 1980s the Social Security program faced a serious short-term financing crisis. President Reagan appointed a blue-ribbon panel, known as the Greenspan Commission, to study the financing issues and make recommendations for legislative changes. The final bill, signed into law in 1983, made numerous changes in the Social Security and Medicare programs, including the taxation of Social Security benefits, the first coverage of Federal employees under Social Security and an increase in the retirement age in the next century. (Summary of the provisions of the '83 Amendments)"

From Mr. Moran's March 1posting on COLA's - https://www.ssa.gov/history/briefhistory3.html

That posting relates to COLA's. Government gives them under various programs then claws them back in taxes.