Alright, I am going to beat up on an innocent man today, but Ron Leiber’s article in the NY Times last week about Roth IRAs sent me over the edge. I am a huge proponent of the Roth IRA, as are a lot of other personal finance bloggers (see my post on turning $5000 into $110,000). However, there have been a lot of articles lately that have been scaring people away from a Roth IRA because of some completely unfounded ideas. If there is one thing I cannot stand, it is media driven hysteria and this hysteria has surely breeched its way into the world of retirement accounts.
What people are saying:
With a democrat in office, people are fearful of having their taxes raised or of having new taxes levied upon them. A lot of people view the Roth IRA as an investment vehicle that is too good to be true (tax-free growth). Because of this, people have started to assume that Roth IRAs are a potential target for new taxes (this could be capital gains taxes or having your withdrawals taxed as income similar to a traditional IRA). This obviously has Roth IRA contributor’s up in arms and has scared away people from taking advantage of the Roth as their investment vehicle of choice (way to go media hysteria!)
Why I think this is dumb (a policy analysis):
I am not a policy expert, but I have studied public policy extensively, and in particular, tax policy. This notion, that Roth IRAs may be taxed in the near future is just plain dumb. The primary reason for a new tax in this economic environment is to create revenue and to help shrink the deficit.
- Firstly, for those that have been paying attention, the government has already found a way to raise revenues with regards to the Roth IRA; by allowing anyone, regardless of how high their income is, to transfer their Traditional IRA funds into a Roth IRA. If you make this conversion, you are required to pay the subsequent income tax on the transfer (this is the government raising its revenue in the short-term, by offering you tax-free growth over the long-term).
- Secondly, taxing the withdrawals from a Roth IRA isn’t going to raise much revenue because so few people have begun to withdraw money from this type or retirement account. Roth IRAs are such a new investment vehicle; the majority of people taking advantage of them are in their 20s, 30s, 40s and young 50s. The government would get no immediate revenue from these people.
- Thirdly, if they taxed the capital gains of a Roth IRA, the government still wouldn’t see much revenue in the immediate future as no one has done well in the market over the past year or so. If the economy was to turn around tomorrow, maybe this would make sense, but let the government tax your Roth capital gains, and they aren’t likely to see a dime next April.
- Fourthly, if the rules of the Roth were changed, you will have a lot of pissed off voters on all ends of the political spectrum that expected the government to stick by their word when they created the Roth as a tax-free growth vehicle. If there is one thing politicians don’t like to do often is pissing off voters.
Why you shouldn’t care:
Don’t believe the hype! You shouldn’t change your opinion of the Roth IRA because of speculative discussions in the media about potential changes in the tax laws. Right now, a Roth IRA is the best place for you to save for your retirement. Don’t let the speculation of the media dupe you into thinking that in 5, 10, 15 years they may change the rules behind the Roth and thus make it not worth your effort to use a Roth as an investment vehicle now! We are not fortune tellers and we can’t foresee the future. However, we, as individuals, see the present and the rules as they are currently written. As it stands now, the Roth IRA is the best way to get tax-free growth over a long period of time when saving for retirement. Focus on how the game is set up today, and play it accordingly.
Living in fear of what the government “might” do in the future is no way to live at all. Its unlikely the rules of the Roth IRA will change in the near future, please ignore the media hype as the media attempts to make you fearful of the government; the government that is coming for your money that was supposed to be tax-free.