Is there a chance the government might decide to change all the rules when it comes to Roth–and throw taxpayers a nasty, expensive curve ball?
Currently, we can put after-tax dollars in our Roth accounts, and those investments then grow tax-free. But what are the chances the government might radically change Roth–or do away with it–in the future?
That’s the subject of this blog post (and companion video).
Questions about Roth
A key aspect of retirement planning is tax planning. If you’re like most federal workers, you probably have a large (and growing) traditional TSP balance, which is yet to be taxed. You decided to defer paying taxes on those earnings. But at some point, “later” will be upon you. What then?
This is why at Christy Capital Management we often get questions like: Would it be better for me to go ahead and pay taxes now, or should I wait? Should I do some Roth conversions? And speaking of Roth accounts, what if the government changes its mind on the Roth rules?
On a recent episode of “The Great Retirement Debate” podcast, Ed Slott and Jeffrey Levine were discussing this subject. They brought up a few facts you should know.
The history of Social Security
Ed and Jeffrey noted that back in the day, the government said it would not tax Social Security. Nothing was ever written in stone about it; it was just kind of understood.
Now, of course, Social Security is taxed at some levels.
This could be seen as an example of where you can’t trust the government.
Roth benefits…and their future
Given that fact, can we trust the government as it deals with the benefits that Roth offers? It’s Ed’s and Jeffrey’s opinion–and mine too–that yes, we can. We can trust the government to keep the benefits of Roth in place.
What are those benefits? The first is that the growth in a Roth is tax-free for your entire lifetime–and up to 10 years after your death, if a non-spouse inherits your account. (This, of course, assumes that (a) you are at least 59 and a half before you touch those gains, and (b) you’ve had the Roth account for at least five years.)
Follow those rules and the gains are generally tax-free.
But why would a revenue-hungry government want to offer tax-free benefits like Roth accounts offer?
Because to enjoy the “tax-free-ness” of Roth later, we have to pay taxes now.
In other words, there is a price of admission.
For those with large TSP balances, it might make sense to go ahead and do some Roth conversions now, in order to save on taxes later. But if you’re at a certain tax rate, that may not make sense. That decision is best made by you and your financial advisor.
Another benefit of Roth is that there are no required minimum distributions during your lifetime.
And a new 2024 rule says there are no required minimum distributions from Roth TSP or other Roth 401(k)s.
Can we trust the government as pertains to these? Ed Slott thinks so. He believes that Congress secretly loves and is even addicted to Roth IRA.
“Wild” about Roth!
Ed Slott points out that back in 2010, Congress set up a special provision where high-income earners could Roth convert in 2010 and pay zero taxes. (They paid half the tax owed for those conversions in 2011, and the other half in 2012.) This was a great benefit if you could take advantage of it.
Many did and tax revenue poured into the federal coffers. Soon after that, in 2012, the Roth TSP was introduced. Later, the government expanded Roth rules again and made the Roth 401(k) and Roth 403b available to workers.
In the Secure Act 2.0, which passed in 2022, Congress went all in for Roth. Now there are SEP Roth IRAs and simple Roth IRA’s. There’s even a provision where 529 accounts can get moved over to a Roth account under certain circumstances. The government has worked out ways where businesses can offer Roth matching contributions.
And, our officials are now even moving toward forcing Roth contributions. This was supposed to start in 2024–it’s been pushed back to 2026. In short, if you’re over the age of 50 and you want to do catch-up contributions and your income is above certain levels, you’ll be forced to make the catch-up contributions go to Roth.
So, not only is the government not discouraging Roth contributions, they are adamantly encouraging them. And in the near future, they may force them in certain situations.
The bottom line?
When people contribute to Roth, they don’t get a tax deduction. They have to go ahead and pay the taxes due. That means extra revenue for the government right away. Read through the Secure Act bill and you’ll find all these new Roth provisions titled revenue provisions.
Because Congress sees Roth as a way to collect more taxes now, they are enthusiastically pro-Roth.
Could they change their mind in the future? Who knows? But at least the tax law is in writing. Surely certain provisions would be grandfathered in.
I could see them fixing a few things around the edges. I can’t imagine that they’re going to take away the tax-freeness of Roth.
Perhaps all this makes you think, I can’t keep up with all these changing rules and provisions–or a tax code that is now tens of thousands of pages long!
If so, and if you’d like some help with your retirement planning, especially your tax planning, reach out to us. In the top right corner of our website, christycapital.com, you’ll see a green TALK WITH AN ADVISOR button. Click it, and leave us a short message. We’ll be in touch right away.
At Christy Capital Management, we help you take the mystery out of retirement.
