The Latest Proposal to Tax Roth IRAs: Should you be worried?

Should you stop doing Roth conversions as part of your retirement planning after Senator Ron Wyden’s new legislation targeting specific retirement accounts? David McKnight breaks down the key aspects of the proposal and what it actually means for the average American (and their retirement).

Show Notes

In this episode, David McKnight looks at whether you should stop doing Roth conversions following Senator Ron Wyden’s introduction of legislation for taxing Roth IRAs.
For David, 99.9% of Americans should continue investing in Roth accounts with a high degree of confidence.
One of the biggest misconceptions floating around is that Congress wants to start taxing everyone’s Roth IRA.
However, that is simply not what Senator Wyden’s proposal does, as its focus are so-called mega-retirement accounts.
These are retirement accounts – whether traditional IRAs, Roth IRAs, or Roth 401(k)s – that have grown to extraordinary sizes, often tens or even hundreds of millions of dollars.
Senator Wyden’s proposal only applies to taxpayers with very high incomes ($400,000 for individuals; $450,000 for married couples) and only if your combined retirement accounts exceed $10 million.
In other words, if you don’t have more than $10 million spread across your retirement accounts, the proposal doesn’t apply to you.
Do you exceed that threshold? Then, know that the proposal would require annual distributions from the excess amount.
The rule becomes even more restrictive when balances exceed $20 million.
David believes that the average American shouldn’t be nervous about investing in Roth accounts – he shares four reasons why.
Reason #1: Congress likes Roth accounts, because, from a Government’s perspective, Roth accounts accelerate tax revenue.
The second reason is the fact that Roth assets are still a relatively small piece of the retirement landscape.
“Most retirement money in America is still sitting inside traditional tax-deferred accounts”, he explains.
Reason #3: the Government has always had an implicit agreement with America on Roth accounts.
The fourth reason why David doesn’t believe you should be nervous about investing in Roth accounts is that they’re still your best protection against what’s coming down the road.
The national debt is set to grow by $2 trillion per year over the next 10 years and $3 trillion per year after that.
According to a Penn Wharton study, once the country hits a debt-to-GDP of 200% in 2040, no combination of increasing taxes or cutting spending will prevent the nation’s financial collapse.
That’s why, David is confident that around 2035 Congress will have little choice but to tax increases.