Sunday, November 23, 2008
Roth IRAs became legal to contribute to in 1998. In 1997 I attended a CPA-attorney pension seminar by an actuary in West Los Angeles. At the seminar's end the actuary asked the attendees if they would recommend the new Roth IRAs. He was shocked when 85-90% of the CPAs present stood and denounced Roth IRAs as a scam. Our opinion: we get a new tax law every two years. By the time anyone under about 45 tries to cash in his Roth IRA, it will be taxable one way or another. We CPAs concluded at a minimum, a Roth IRA would reduce one's social security (SS) payments. How? Through "imputed withdrawals" beginning at 70.5. If you had a $500,000 Roth IRA balance, assuming your life expectancy at 70.5 was 27.4 years, divide the $500,000 by 27.4 to get $18,248. Now Uncle Sam does not make this taxable; Unc has the Roth IRA holder report $18,248 to the SS Administration which multiplies it by 25% and reduces your SS payment $4,562. This is not a "tax increase", is it? Or else the Roth IRA would be subject to a 10% "excise" tax on "required mandatory distributions" after 70.5. The only issue we discussed was the mechanics of how Unc would make Roth IRAs taxable and what would be the triggering mechanism to do so. Our guess: once $1 trillion was in Roth IRAs, Congress would see $100 billion coming from the excise tax and lots more from SS reductions. Imagine, some people converted regular IRAs to Roths and paid income taxes to get Unc's promise of future tax-free withdrawls. Hahahahaha! On 3 March 2007, Edward McQuarrie wrote about this possibility at Barron's. Here's a link: http://investment.suite101.com/discussion.cfm/66/45844#message_1.
Anyone investing based on today's tax attributes for anything, be wary. If your tax planner does not discuss the possibility of tax law changes, dump him! Read McQuarrie's article. Be warned: Congress will stop at nothing to seize your money. Welcome to Argentina. Bienvenidos a Arjentina.