Academic journal article Journal of Accountancy

Risky Roth IRAs

Academic journal article Journal of Accountancy

Risky Roth IRAs

Article excerpt

Comparing the risks of Roth IRAs versus traditional IRAs means weighing a future unknown benefit against a certain one. Traditional IRAs have immediate tax savings. Roth IRAs, on which taxes are prepaid, may have a future benefit that is less than the prepaid tax.

Specifically, there are three risk factors for Roth IRAs.

The first risk is the possibility that the IRS or federal income taxes may not exist in the future. Although you may be smiling (or, perhaps, even laughing), bear in mind that in June the House passed the Tax Code Termination Act, which would eliminate the current tax code (except for Social Security payroll taxes) on December 31, 2002.

In addition, a grass-roots group of taxpayers called the Citizens for an Alternative Tax System (CATS) is pushing for the Schaefer/Tauzin National Retail Sales Tax Act. This act would replace income tax with a sales tax.

The second risk is the possibility that money received from a Roth IRA distribution might not be subject to tax at all if, when it is combined with other earnings, the total amount of income has not reached a taxable level.

The third risk is the likelihood that the present value of the prepaid tax (the cost) of a Roth IRA may be greater than the present value of the future tax savings (the benefit). …

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