As Washington Hunts For New Revenues, Roth IRAs Could Join Munis As Candidates For Tax Treatment Changes

Wednesday, December 05, 2012 07:45
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As Washington Hunts For New Revenues, Roth IRAs Could Join Munis As Candidates For Tax Treatment Changes

Tags: deficit | roth ira conversion | Taxes

Washington is hungry for revenue. In its quest to resolve the deficit and fiscal cliff issues, it’s conceivable that Roth IRAs could become preference items that trigger the alternative minimum tax (AMT).

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There is a perception that the wealthy have been using Roths or vehicles like it to take advantage of the system.
 
That means even the $270 billion in total Roth IRA assets—small potatoes compared to other sources—could factor into an effort to raise taxes.
 
With the tax exempt status of municipal bonds coming into consideration, it’s not unthinkable that Roths could enter the equation.
 
Roths hold great appeal for investors because income can be withdrawn tax free. And there are income thresholds for being eligible to contribute to a Roth, making them appear to be an unlikely haven for the rich.
 
It would be a bold move for Congress to tax Roth withdrawals. But putting them within the income calculation to determine AMT tax liability could make Roths part of a larger package designed to increase revenues.
 
Although including Roths in the AMT calculation could be perceived as another way to tax the wealthy, it would actually trickle down to the middle class since the AMT tax is not indexed to inflation.
 
So far, Congress has prevented the AMT creep as it is called by passing temporary patches.
 
Once current tax laws expire, however, those subject to the AMT will balloon to include 25 million more taxpayers.

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