Possible Roth Grandfathering?
I’ve had a few clients ask if I have seen any articles or had any details about Roth IRAs being “Grandfathered” if the rules change down the road. Specifically, the clients have concerns that future changes would remove any tax benefits of the Roth. I explained that in my way of thinking, the final regs on the issue are in. Even if they changed the rules down the road it would be extremely difficult and a political hot potato having already paid taxes to convert that the government would after changing the rules go back and require taxation on growth
Another concern would be if they were doing a Roth Conversion over a 5 or 10 year period and the rules changed could these impact future conversions. Do you have any articles or any discussion points that address these issues?
Permalink Submitted by Alan Spross on Thu, 2008-09-18 18:16
The idea of grandfathering current Roths in the event of a rules change is based on the concept that there is a limit on the degree of bad faith included in tax changes. That has always been the pattern.
With the bailouts and budget situation deteriorating by the day, the Treasury will need current tax revenue more than ever. Therefore, Roth contributions and conversions will be much preferred over pre tax contributions to retirement plans. They expect considerable tax revenue from the 2010 rules changes, because through today 1998 was by far the largest year for Roths because that year offered the 4 year tax deferral. With a two year deferral PLUS no income limits, 2010 conversions will probably surpass the amount done in 1998. Today, only about 5% or all IRA assets are in Roth IRAs.
I an not inclined to speculate on the nature of any tax changes with respect to Roth IRAs. I do not expect restrictions at all in the foreseeable future, but if there were I agree that existing Roth accounts would be totally grandfathered. If new Roth accounts carried restrictions from that point forward, that argues for taking more advantage of the Roth now while it still exists in the current form. If someone is converting incremental amounts over a period of years, and if the law were changed, it would likely just mean that future conversions would go into an account with different tax provisions. Prior conversions would not be affected.
I have not seen any recent articles dedicated to the prospects for future Roth tax law changes. I imagine the largest threat to Roths would not be changes to the Roth rules, but the introduction of some sort of national sales tax on top of the income tax. That would keep income tax rates from rising and thereby reduce the relative value of a Roth. That is, you would take your Roth distribution tax free, but then pay a national sales tax on purchases with that money.
As for today, with the markets in the shape that they are, I would expect that there are quite a few people looking at their 2007 conversions and wondering if they should recharacterize them prior to the 10/15/08 deadline and eliminate the tax bill for the conversion.