What did I tell you? The Grassroots Corner of June 14, 2021 dealt with the hostile question, “I paid taxes all my life, now the FAIRtax wants to tax me again in retirement when I spend my money?” That’s not fair.
The hostile question about paying taxes again in retirement comes mainly from mature citizens who invested heavily in Roth IRAs over the years. Roth IRAs are savings accounts funded with after-tax dollars, i.e., dollars on which you have already paid income tax. Investment returns earned on a Roth IRA are not taxable, and since it was funded with after-tax dollars, there is no income tax due when you withdraw your money from a Roth IRA.
The argument is that money invested in a Roth IRA was taxed when it was earned. Now the FAIRtax is going to tax it again when it’s withdrawn and spent. That’s double taxation and that’s not fair.
Here is how we began our response:
“First question: ‘Do you really think there will never be an income tax on Roth IRA withdrawals? Think again!’ In 1936 the government sold us Social Security with a promise that Social Security benefits would never be taxed. In 1983, as Social Security was going broke, the law changed. Now Social Security benefits are taxable up to 50 percent for single taxpayers with incomes over $25,000 and jointly-filing taxpayers with incomes over $32,000. Don’t forget that the contributions into Social Security during the earning years were made with after-tax dollars.
“So, if the Federal Government broke its promise for Social Security benefits, what makes you think it will keep its promise for Roth IRAs? After all, Uncle Sam is going broke and is constantly on the hunt for new sources of revenue.”
Wouldn’t you know, it may not!
The Federal Government is thinking of breaking its promise for Roth IRA’s. Have a look at an October 12, 2021 opinion piece in USA Today by former Democrat Senator from Montana and former Ambassador to the Peoples’ Republic of China, Max Baucus. In the article, Baucus begins with the premise that, “As Congress figures out how to pay for the large bill (to stop the spread of COVID-19, boost our infrastructure and tend to enormous social needs,’) … , increased taxes on the wealthy should be on the table. Even so, these tax increases should be fair.” …
Baucus continues, “In the current House tax bill, however, several of the proposals for retirement savings accounts are retroactive, punitive and confiscatory. Let me explain.” …
Turning to Roth IRA’s, Baucus says, “For Roth IRA holders it is much worse. Withdrawals from a Roth IRA are currently tax-free because their contributions were made with after-tax dollars. That’s the law.” …
And now the hammer falls:
“The House Ways and Means bill will require withdrawals [for Roth IRA’s] after a certain level and, for many people, those withdrawals will require exorbitant tax payments even though under current law they were entitled to withdrawals with no tax payments.” (Emphasis has been added.) …
So, Baucus is not against taxing Roth IRA withdrawals. He merely states, “The proposals need not be retroactive to achieve the policy result. There are ways for any new taxes to be prospective. The best proposal would be to set a cap on contributions to large accounts, but allow existing IRAs to continue to operate as under current law.”
So as long as taxing Roth IRA’s is prospective and not retroactive, Baucus thinks it’s OK.
If you would like to read the opinon piece, here is the link: www.usatoday.com/roth-iras
So, my forecast, sadly, may be coming true. Congress cannot help itself from pulling the rug out from predictable tax outcomes.
With the FAIRtax, we can expect a more stable administration of our tax code. With the FAIRtax, you can withdraw from your Roth IRA whenever you want. You do not have to wait until you are 59½. And you will no longer be required to begin taking a required minimum distribution (RMD) beginning at age 70½. That means there will be no RMD penalty if you decide you’d rather leave your money in your account.
With the FAIRtax, your money is yours to do with as you please.
And with the FAIRtax, Congress can no longer change its mind. The 16th Amendment was ratified in 1913. It made an income tax Constitutionally permissible. Permanent implementation of the FAIRtax depends on repealing the 16th Amendment thereby making an income tax unconstitutional again.
If the 16th Amendment is not repealed during the seven years following the initial enactment of the FAIRtax, the FAIRtax sunsets.
Bottom line: Under the FAIRtax, there’s no more messing with your Roth IRA!
AFFT Grassroots Coordinator & Secretary
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