How Safe Is Your Roth IRA?

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The Roth IRA is something close to motherhood, baseball, and apple pie among America's middle class.  Thus it's a rather novel sensation to see someone named Gerald Scorse, who seems to be a left-leaning tax activist, takes to the pages of the LA Times to excoriate them.

In a Roth, taxes are treated the other way around. There's no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There's no requirement that you make a minimum withdrawal -- after age 70 1/2, or ever.

All of which makes Roths a perfect "fiscal Frankenstein." In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.

For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they're a bit like toxic instruments on the nation's books. Worse, Congress has them on steroids, and President Obama wants to up the dosage.

The limit on annual Roth contributions has risen from $2,000 to $5,000. Persons over 50 can add another $1,000 to "catch up." That's a $6,000 per-year maximum, $12,000 for a married couple -- triple the original limits.

While this argument is rather novel, I doubt it will be unique.  I'm less excited about Roth IRAs than most people who write about personal finance, and that's because over the years, I expect we're going to see a lot more op-eds like Scorse's.  When I look at the budget problems we face, I'm skeptical that Congress is going to live up to its promise to keep its hands off that money.  At the very least, I'd bet that high earners are going to see some sort of surtax on their Roth withdrawals.

Of course, I think this is true of non-Roth retirement savings as well.  Ultimately, Congress is going to be faced with penalizing people who didn't save adequately for retirement by cutting their benefits, or penalizing people who did save, by raising taxes on their savings.  For a lot of reasons, I expect them to err on the side of penalizing savings.  This may have some very ill effects on capital formation in the US--but by the time they're making this decision, everything they do is going to have some very ill effects on something.

So why, despite all this, do I recommend higher savings?  Why not consume now and force Congress to subsidize a modest existence later?

In part, I'm afraid, it's just my bourgeois ancestry speaking: decent people do not deliberately put themselves in a position where others are forced to support them--no, not even if lots of other people are doing it.  But also because it's important to be financially comfortable in retirement, if you can swing it--and while Congress may penalize savers, I doubt it will actually make them worse off, on average, than people who didn't save.

"To hell with that!" say some of my commenters.  "I want to enjoy my money now, when I'm young!  Who cares if my old age is miserable--being old is miserable anyway!"

This sounds to me rather like the people I knew in college who didn't bother about getting themselves a career, because being 35 sucks anyway.  When last heard from, several of them were using their Ivy League degrees to perform modestly remunerated administrative and clerical work.  It is true that in many ways 38 is not quite as much fun as 18, starting with the fact that 18, I could raise both arms all the way over my head, and my lower back didn't bother me on long car trips.  But it's still surprisingly enjoyable--especially if you have an interesting job that provides some income.  While it's true that the thought of myself at 68 is still kind of horrifying, I assume that it will be considerably less horrifying if I can spend the occasional month traveling around Europe.

So I don't advise not saving.  But I've started thinking about saving in ways that Uncle Sam won't be tempted to touch--like paying off your house early, maybe buying a vacation home (for cash) if you know where you're likely to want to spend a lot of time, and doing the kind of renovations that save you money in the long run--better insulation, higher-end energy-efficient appliances, etc.  Paying now to lower your monthly costs later may have a better after-tax return than that "tax free" account.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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