Obama's Tax Proposal Saves 529s: What About Roth IRAs?
Obama's dropped his proposal made during his State of the Union address to tax withdrawals on 529 plans. These are special plans that allow after-tax contributions to an investment account designed to pay for educational expenses - typically college tuition, room and board - where any gains grow tax-deferred and which additionally do not tax any gain when the money is withdrawn to pay for college expenses. Obama had proposed that gains be taxed on withdrawal.
A minor uproar ensued - more in the advisor community than from consumers from what I saw and heard - but it's all water under the bridge now that the threatened tax has been rescinded. (Curiously, Obama was reported to have socked away $240,000 in 529 plans for his two kids in 2007, and so his plan would have taxed his withdrawals, one assumes. Did this have anything to do with the quick and easy renunciation of the plan within 11 days of the State of the Union address ?)
Now, however, some in the investment advisory community wonder whether the attempt to highjack 529 profits for the government's coffers might only be the tip of the iceberg in a federal government plan to grab anything and everything they can get their mitts on. This concern would include Roth IRAs.
Here a sage comment from one such advisor:
When my concerns have been questioned or criticized in the past, I've reminded people that at one time the government declared that it would slap an additional 10% excise tax on withdrawals from all IRAs valued at $1 million or higher. That scheme was also withdrawn, but not so quickly as Obama's, and only as the result of a much more vocal out-roar. Most people, naturally, have completely forgotten about that attempted government grab, but that's of course exactly what the federal government counts on: the short, virtually non-existent memory as well as the short attention span of most contemporary Americans.
It's quite reasonable to be skeptical of government's intentions as a general rule. Even more so when you familiarize yourself with the current federal balance sheet as well as Washington's fiscal policies. If you don't agree, by all means follow the typical advice of government officials and the vast majority of investment advisors: put as much as you can into 401ks, IRAs and Roth IRAs, without considering whether you've got any money outside these plans just in case the government decides to change the rules in mid-stream and reverse or negate the purported tax advantages.
On the other hand, perhaps you may at least agree with the seemingly more moderate view of this advisor:
A minor uproar ensued - more in the advisor community than from consumers from what I saw and heard - but it's all water under the bridge now that the threatened tax has been rescinded. (Curiously, Obama was reported to have socked away $240,000 in 529 plans for his two kids in 2007, and so his plan would have taxed his withdrawals, one assumes. Did this have anything to do with the quick and easy renunciation of the plan within 11 days of the State of the Union address ?)
Now, however, some in the investment advisory community wonder whether the attempt to highjack 529 profits for the government's coffers might only be the tip of the iceberg in a federal government plan to grab anything and everything they can get their mitts on. This concern would include Roth IRAs.
Here a sage comment from one such advisor:
“We know that when Congress needs dollars, they're going to get them,” said Phillip Cook, president and owner of Mogul Wealth Management Inc.It warms my heart to see that others share my concern in this area. I've been one of the few who have not been enthusiastically promoting government sponsored and endorsed plans like IRAs, Roth IRAs, 401ks, etc. due to my skepticism about the government honoring its commitments. While that doesn't mean one ought never put money in these, it might be wise to consider just how much of your total net worth you want to subject to government fickleness and greed.
When my concerns have been questioned or criticized in the past, I've reminded people that at one time the government declared that it would slap an additional 10% excise tax on withdrawals from all IRAs valued at $1 million or higher. That scheme was also withdrawn, but not so quickly as Obama's, and only as the result of a much more vocal out-roar. Most people, naturally, have completely forgotten about that attempted government grab, but that's of course exactly what the federal government counts on: the short, virtually non-existent memory as well as the short attention span of most contemporary Americans.
It's quite reasonable to be skeptical of government's intentions as a general rule. Even more so when you familiarize yourself with the current federal balance sheet as well as Washington's fiscal policies. If you don't agree, by all means follow the typical advice of government officials and the vast majority of investment advisors: put as much as you can into 401ks, IRAs and Roth IRAs, without considering whether you've got any money outside these plans just in case the government decides to change the rules in mid-stream and reverse or negate the purported tax advantages.
On the other hand, perhaps you may at least agree with the seemingly more moderate view of this advisor:
“My clients are asking those same kinds of questions right now,” said Leon LaBrecque, chief investment officer at the wealth management firm LJPR.Then again, one has to ask the question: Who says they "can't change the tax law retroactively"? Setting aside the fact that a central government as powerful as that of the United States can and has done pretty much whatever it wants to do when it really wants to do it, we've already seen them declare that withdrawals on IRAs of over $1million would not only be taxed, as originally understood, but would be subject to a special 10% excise tax. Isn't that "retroactive" considering that people put money into them thinking money would come out simply taxed at ordinary income tax rates?
“I remind them that the government can't change the tax law retroactively, but they can change the tax law going forward,” he added. “Generally, when Congress wants to get money out of something, they do it stealthily.”
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