The Roth IRA
Slott, who is often billed as America’s IRA expert in his presentations at conferences and on PBS television, also addressed the future of the accounts.
One of the most potent tax planning tools available to advisors and their clients, Roth IRAs allow clients to take tax-free withdrawals in retirement under the right conditions. As long as a client is past the age threshold of 59 and a half, before which a 10% tax penalty is levied on any IRA withdrawals, the money comes out without being taxed, as it was already taxed as income before it was contributed to the IRA.
But many advisors and their clients believe that the Roth IRA is in peril—that the U.S. government will try to eliminate the tax-free withdrawals before investors can take advantage of them.
“I love Roth IRAs, I believe in them, and I love Roth IRA conversions,” Slott said. “I love the idea of never having to worry about taxes. But when I talk about Roth IRAs, I get passionate responses that I’m not representing the other side. They ask ‘Can I trust the government to keep their word that Roth IRAs will always be tax free?’ The answer is absolutely not, you can’t trust these guys as far as you can throw them, and tax laws always change.”
However, Slott said it is unlikely that Congress will do away with the tax-free characteristics of Roth accounts.
For one thing, the wheels of change move very slowly, and Congress is more likely to make incremental changes to retirement accounts than a wholesale shift in tax policy.
For another, Congress likes “Rothification,” said Slott.
“Secretly, Congress love, loves, and I mean loves, Roth IRAs. They’re addicted to them like crack. They love the money that comes in up front from Roth IRAs.”
With traditional IRAs, income taxes are deferred until money is withdrawn from the account, but in Roths, taxes are paid before contributions, he said. Congress would rather have less money now to support their budget authorizations than more money in the future to support the proposals and programs of a different set of legislators.
Thus, the Roth IRA should continue as a valuable tax-planning tool for some time to come.