Our President has made it clear that a redistribution of wealth from the top 1% is his main priority. In his recent State of the Union address, he outlined a number of ways he felt would achieve this goal, one of which dealt with 529 plans. The President's plan was to remove all the tax advantages related to 529 plans (as discussed in Pete’s previous blog). Criticism from the media, financial advisors, concerned parents and members of the House and Senate was swift and harsh. The President stepped back from the 529 proposal and decided that taxing 529 plan growth and withdrawals was not the way to go.
Our thought (and one that is popping up more and more in the investment media) is that if the President would go after 529 plans, could Roth IRAs be next. Millions of people use the Roth IRA as a way of shielding future taxes on investments. Millions have converted portions of their IRA accounts into Roth IRAs under the guise of tax-deferred growth, no required minimum distributions and no tax on withdrawals when you do take the money out.
The government established the Roth IRA because they wanted tax money now. They were willing to forgo future tax revenue to do this. Now they are seeing the impact of this decision as the value of Roth IRAs increases significantly over time. Could the government decide that this was a mistake and rollback the tax advantages of the Roth? Who knows, but I am sure that any attempt to roll back the Roth IRA benefits would incur the same backlash as the 529 plan proposal.
Should you want to discuss this topic or any other wealth management questions, please call us.