Can A Roth IRA Be Taxed?

June 2nd, 2008  |  Published in Retirement  |  2 Comments

One of the greatest concerns many Americans have about Roth IRAs is whether a change in the tax code can end up screwing us. Right now, you are taxed on contributions made into a Roth IRA but you are not taxed when you take distributions. This is different than the Traditional IRA where you get tax-deductible contributions but are then taxed when you begin taking distributions. There are plenty of other differences but that’s the biggest one when it comes to the two.

So, can Uncle Sam, in a pinch, decide to double tax Roth IRAs? Of course they can. If we moved to a Fair Tax/consumption tax where income tax is removed and we are taxed on what we spend, that’s essentially a double tax on the Roth IRA. The government could also lower tax rates, increase tax rates, or change the game completely (in the case of a consumption based tax).

The key is to diversify your tax profile so that you hedge your bets. Contribute to a 401(k) or 403(b) as well as a Roth IRA. You get tax benefits today as well as tax benefits in retirement.

Don’t put your eggs all in one basket! (unless it’s my basket!)

  

Responses

  1. JoeTaxpayer says:

    June 2nd, 2008 at 6:35 pm (#)

    I doubt it will be taxed (again). How would anyone have the data to separate out the principal? If I deposit $10K today, and it’s not gone up in 10 years, What would they tax? At least on a non deducted IRA, the deposits are tracked.

    I think there’s a chance the withdrawals will count toward the income that triggers SS tax, but the same issue applies. Those withdrawals may be the original deposits.
    Joe

  2. retirehappy says:

    June 3rd, 2008 at 1:09 pm (#)

    Let’s say we go to a Fair Tax-type system, that’s double taxation and a scenario I can see happening.