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Is A Roth IRA One Of The Best Protection Against High Future Tax Rates?

Roth IRA Tax Protection!

If taxes are going to raise and especially on dividends from stocks, is the venerable Roth IRA the only protection that we as middle income/class folks have against getting gouged by the (T)ax man?

What if you are relying on a dividend or some other type of income stream in the future, and all of a sudden you retire and instantly the tax rates double?  Or maybe the tax rates rise slowly over time to a point where you can never really live on a money steam without the fear of running out of money before you die, so you work forever?

Is that really any way to live?  I dread having to worry about my money so much, isn’t there enough in live to worry about already?

But even if they tax rates jump to a ludicrous combined total percentage (let’s pretend 90% for everybody), in a Roth IRA, you are for the most part safe against taxes!  You are safe because even if the tax rate increase to such an unbelievably high level, when you pull your money out of your Roth IRA, its tax-free!  And that makes all the difference when it comes to retiring comfortably and living with less stress!

Actually, in the finance world, a Roth IRA is some what of a superhero versus the run of the mill retirement instructions out in the market place.  The extra benefits of owning a Roth IRA makes it a financial instrument that everybody should consider!  Read my previous articles why I consider the Roth IRA to be such a superior product in my previous article titled: Roth IRA Unusual Benefits.

With the debt and overspending happening in the United States, it’s inedible that eventually taxes will get raised, and perhaps to a very high rate to boot.  So while you might not sole reply on a Roth IRA for your future, perhaps it would be a wise choice to diversify your retirement paths and start or if you already have one, channel more of your hard-earned money into such a superb financial device?

Bests,

Don

18 Responses to Is A Roth IRA One Of The Best Protection Against High Future Tax Rates?

  1. Don, I appreciate your blog, but if you think that the tax rate could go up that high, what would stop the government to change the law again to tax on roth IRA? Just a thought.

    • Yeah, I thought of that too (and same with 401ks too).

      But I think such a move would be very unpopular and political suicide for which ever party tries it.

      That said, I think the govs tactic would be to go another way and trick you into not realizing that it’s really a new tax, kind of like the new Healthcare plan. It’s really just a big ole tax… :(

      • I work for the government, too. And I used to think that my pension might be safe, but not any more – not after watching the European crisis and many munis going bankruptcies. I think that they will find a way to tax Roth if things get bad enough.

  2. I have no idea how the government will change things by the time we retire, so I am trying the hedge my bets. We each have a Roth IRA, I am leaving my 401k alone, and we will be opening a pre-tax self-employment savings account next year. We’ll see if it all works out as planned down the road…

    • There are some great self-employed options out there, like individual 401ks and the like.

      Awesome, you’re going great!

  3. I continue to watch the Roth discussion and wonder how it will play out. In 2012, a MFJ couple are in the 15% bracket up to $70,700 of taxable income. Add the standard deduction of $11,900 and 2 exemptions of $3800 each, totaling a gross $90,200.

    Let me repeat that, $90K gross income, 15% bracket. It would take $2.2M in pretax account to withdraw this much at a 4% withdrawal rate. The retiree today who has <$2M would have made a mistake to Roth any money earned at 25%. Of course this includes pension income or any other taxable income, so these examples are an over-simplification.

    Curious what your thoughts are on my analysis.

    • I agree as long as the taxes stay at the current rates, but I’ve afraid along with the rest of america, the government is way paste what is considered acceptable spending. So higher taxes are almost certainly in the cards for the US…

      A side benefit of the Roth (and one that nobody considers) is that dividends aren’t taxed in a Roth IRA (or options either I believe)… It’s like the ultimate loophole :)

    • Joe interesting point. In general I think folks are too quick to embrace the Roth. It’s not that I dislike Roth (IRAs and 401ks) but one has to consider the time value of money in terms of a tax deduction today vs. some unknown amount of tax savings at some point in the future. I am also leery of future predictions of any sort, including the seeming certainty that many ascribe to excessively higher tax rates in the future. Seems logical, but so did the prospect of interest rates being at a much higher level by now.

  4. I’m all for the Roth IRA! It’s just as important to diversify from a tax point of view as it is to diversify between stocks and bonds. You cannot predict where tax rates will be in the future and if I had to guess, I would say they’re going up! More debt equals more taxes and I wouldn’t be surprised either if they found a way to tax the roth ira :)

    • Yep, you and I are on the same plan on the future of taxes… Sad huh :(

      While I have a diversified mix of retirement vehicles, I’m starting to pay more and more attention to my Roth lately…

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