Will Roth IRA Withdrawals Be Taxed in the Future?

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Will Roth IRA Withdrawals Be Taxed in the Future?

They now provide some of the greatest tax benefits of any retirement plan. However, there is considerable concern that Roth IRA withdrawals may be taxed in the future. The fiscal deficit concerns of the United States government stoked the fires in the early 2010s. More recently, the Tax Cuts and Jobs Act of 2017 added gasoline to the flames by eliminating several itemized deductions and eliminating the option to reverse traditional-to-Roth-IRA conversions.

Current tax legislation allows you to withdraw Roth contributions and profits tax-free if you are at least 5912 years old and have contributed to a Roth IRA for at least five years.

Key Takeaways

  • You already pay taxes on Roth IRA contributions in the year they are made.
  • Taxing Roth IRA withdrawals would essentially eliminate a source of investment money for the economy.
  • Other retirement plans, such as 401K)s, would be a much more lucrative source of tax income.
  • Even if the legislation was altered, current accounts would very certainly be excluded.

5 Reasons Roth IRAs Won’t Be Taxed (Probably)

The argument for taxing Roth IRA withdrawals is that the tax advantage is much too great. After all, other tax-sheltered retirement plans are just tax-deferred, which means you’ll have to pay taxes on them later. Roth IRA profits are basically tax-free.

Furthermore, some rich taxpayers have discovered a technique to circumvent the income limitations on Roth IRA contributions. Using a technique known as a backdoor IRA, they have amassed accounts worth millions, and in at least one documented instance, billions of dollars—a potential that the Roth IRA’s designers almost certainly did not anticipate.

However, although taxing Roth IRA withdrawals may seem inevitable at some time, there are at least five reasons why it is unlikely to occur.

1. Roth Contributions Aren’t Tax-Deductible

Your Roth IRA contributions are taxed. Money placed into a Roth is after-tax money. So you don’t receive a tax savings up front, but eligible withdrawals are tax-free.

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Contributions to regular IRAs, on the other hand, are tax-free. If you fulfill the income requirements, you may deduct your donations when filing your tax return. This reduces your taxable income for the year, saving you money on taxes. Because you obtain the tax advantage up front, you have to pay taxes when you withdraw cash from a regular IRA.

20.5%

As of 2020, the proportion of US households that possessed a Roth IRA.

2. Roth IRAs Help Build the Nation

We prefer to think that the major goal of developing tax-sheltered retirement plans is to assist individuals in planning for retirement. However, there are other influences at work on a larger scale.

Every country need funds to grow and expand its enterprises and industries. That implies that someone somewhere has to be putting money aside for investments like stocks, bonds, and real estate.

Furthermore, significant federal deficits imply that capital must be willing and accessible to purchase the government’s debt.

However, except in tax-sheltered retirement plans, Americans are known for being non-savers. Whatever techniques the government employs to increase tax collection, retirement plans are likely to keep their favorable tax status.

Tax advantages are a major reason why people participate in retirement plans. If the tax breaks go, so do the plans, and a large portion of the nation’s capital base with them. This would result in far worse budgetary challenges than we now have.

This brings us to the second reason Roth IRA withdrawals are unlikely to be taxed.

3. A Tax on Withdrawals Would End Roth IRAs

If Roth IRA withdrawals were taxed, the program would almost surely die. The secret sauce that season this financial meal is tax-free withdrawals. Take that away, and you’re left with simply another tax-deferred savings account, which we already have enough of.

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The Roth IRA program is quickly expanding, providing ever-increasing contributions to the national economy. We can be certain that the government has no intention of terminating the program, which is precisely what would occur if withdrawals were made taxable.

4. Roth IRA Contributions Are Comparatively Small

Despite their growing popularity, Roth IRA plans remain a minor player in the retirement-plan landscape. They’ve just been around since 1997. In addition, the yearly contribution restrictions are rather modest in terms of dollars.

For tax year 2022, the maximum annual contribution to a Roth IRA is one of the following:

  • $6,000, if you’re under age 50
  • $7,000 if you’re above the age of 50.

In comparison, consider 401(k) plans. They’ve been operating since 1978, and the contribution limits for 2022 are $20,500, with an extra $6,500 catch-up contribution if you’re 50 or older. Furthermore, many businesses contribute to the account by matching part or all of their workers’ contributions.

If the government were looking for tax money, 401(k) plans would be a far more lucrative source.

5. Even if Roth IRAs Are Taxed, Existing Money in Existing Accounts Will Likely Be Exempted

How can we be certain about this? Simply read the tax code. It’s jam-packed with unique supplies. Look for “pre-” or “post-” prefixes followed by a date. They are scattered throughout the IRS rules.

When you see these terms, it typically signifies that a special exception has been made for everyone who participated in a program before the rules changed. If Roth IRA withdrawals become taxable at some time in the future, this will very probably be the case.

When Can You Withdraw Money From a Roth IRA?

Contributions to a Roth IRA may be withdrawn tax-free and penalty-free at any time (because they have already been taxed).Withdrawals from your account’s profits, on the other hand, will be subject to taxes and penalties unless you have owned a Roth IRA account for at least five years and are at least 5912 at the time. Disability, purchasing a first home, and paying eligible higher education expenditures are all exceptions to the age 5912 requirement. All of these restrictions are outlined in IRS Publication 590-B: Individual Retirement Arrangement Distributions (IRAs).

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What Are the Income Limits on Roth IRAs?

The income restrictions for Roth IRA contributions might alter from year to year. Limits for 2022 are as follows:

  • $144,000 for single filers and heads of family (earnings between $129,000 and $144,000 qualify for a partial payment).
  • $214,000 for married joint filers (income between $204,000 and $214,000 is eligible for a partial contribution).
  • The restrictions for married taxpayers filing separately differ based on whether or not they resided with their spouse at any point throughout the year.

This implies that if your income falls below the phase-out threshold, you may contribute the full authorized $6,000 (or $7,000) to a Roth IRA in 2022. If your income falls within the phase-out range, your contribution will be reduced.

What Is a Backdoor Roth IRA?

A backdoor Roth IRA is a mechanism that allows persons with earnings exceeding the Roth IRA restrictions to finance a Roth IRA. They first donate to a regular IRA (which has no income constraints) and then convert that money to a Roth IRA. Despite much criticism, this practice is still legal as of early 2022.

The Bottom Line

Based on what we know now, you can continue to fund your Roth IRA with confidence. Your future self will be grateful.

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