Is it possible that the government might shift the rules surrounding losses, throwing a complex and costly issue at taxpayers?
Right now, we can invest post-tax dollars into our Roth accounts, where those investments can grow without being taxed. But what are the chances that the government could fundamentally alter how future losses are handled?
Questions about Roth
Tax planning is a crucial part of retirement strategy. If you’re like many federal employees, your traditional TSP balance is quite substantial and hasn’t been taxed yet, meaning you’ve opted to defer taxes for now. However, at some point, that “later” will arrive. So, what do you do?
This leads us to common questions we get at Christy Capital Management: Should I convert my losses? And, considering the nuances of Roth accounts, what happens if the government decides to change the rules concerning them?
Recently, on “The Great Retirement Debate,” Ed Slott and Jeffrey Levine tackled these topics. They shared some key insights worth noting.
The History of Social Security
Ed and Jeffrey suggested that, in the past, the government didn’t tax Social Security. It wasn’t explicitly stated, but it was generally understood. Yet today, that’s not the case—Social Security benefits are taxed at various levels.
This serves as a reminder that trusting the government can be tricky.
Roth’s Benefits and Their Future
With that in mind, can we trust the government regarding the benefits tied to Roth accounts? Both Ed and Jeffrey feel that, yes, we can. Although, there’s always a bit of skepticism, right?
One significant advantage of Roth accounts is tax-free growth throughout your life, and for up to ten years after your death if someone other than your spouse inherits it. This, of course, hinges on the condition that you’re at least 59 and a half when you start using those benefits.
Given these rules, profits are typically tax-free. But why would a tax-hungry government want to extend such tax-free perks? Because enjoying those benefits means paying taxes upfront—there’s that initial cost.
For those with a sizeable TSP balance, converting losses might save on taxes in the long run, though it depends on your tax bracket. It’s a decision best made with a financial advisor.
Another perk of Roth accounts is the absence of required distributions during your lifetime. Plus, a new rule in 2024 states there won’t be a mandatory distribution from Roth TSP or similar plans.
Ed Slott is optimistic about these changes. He believes Congress likes Roth IRAs and may want to keep promoting them.
“Wild” about Roth!
Ed noted that back in 2010, Congress initiated a special provision allowing high earners to convert their losses without incurring taxes for the first half, with the remaining half taxed the next year. This could have been a golden opportunity for many.
Following this, some significant tax revenue was generated for federal funding. Shortly thereafter, the Roth TSP was introduced in 2012, expanding the Roth options to 401(k) and 403(b) plans.
Under the Secure Act 2.0 after 2022, Roth options grew further, adding SEP Roth IRAs and simple Roth IRAs. There’s even a rule allowing for 529 accounts to convert to Roth accounts under specific circumstances. The government has even highlighted ways businesses can match Roth contributions.
Moreover, officials are planning to mandate Roth contributions starting in 2024, though this has been postponed to 2026. Essentially, if you’re over 50 and looking to contribute more, high earners will be pushed toward Roth accounts for those contributions.
This demonstrates that the government is not just indifferent toward Roth contributions; they are actively promoting and potentially enforcing them in the future.
Conclusion?
When individuals contribute to a Roth, they don’t receive a tax credit; they pay taxes upfront. This adds to government revenue, which Congress seems eager to cultivate through Roth accounts.
Could they change their minds down the line? It’s hard to say. However, the current tax laws are documented, and certain elements may even be grandfathered in. It’s plausible that some adjustments might occur, but the fundamental tax structure of Roth accounts is likely to remain intact.
