Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

FairTax and Roth IRA's....

Hello FairTax Supporters....

Can anyone answer these questions?

**Is there any reason to think that Roth IRA's won't be negatively impacted by the FairTax?

**How are IRA's, both Traditional & Roth, affected by the FairTax?

THANK YOU!!!

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Permalink Reply by chiefcook on July 18, 2012 at 10:35am

After the demise of the income tax code, you will be able to withdraw any amount of money (principle and/or interest) from any account you wish. There is no tax on income or earnings. End of story.

Under the current income tax system now, whenever you spend any money, you ARE currently paying the embedded taxes for goods or services. It does not matter where you got the money. It could be from your checking, saving, 401k, Roth, sale of stocks etc, you will still pay the embedded tax costs. There may be double or triple taxation involved. The FairTax is a replacement tax on this embedded tax costs just the same as you are currently paying. There is no need for an adjustment for the Roth. You may want to congratulate those that put their funds into the 401k with no income tax payment and under the FairTax do not have to pay any tax when they take the money out under the FairTax. Also, the individual that paid income tax on regular income and on the interest earned (before the FairTax) and later pay the FairTax when the money is spent.

The worst case would be if Congress passes a law to take all the monies in retirement accounts of all kinds and use it for wealth redistribution before we can get the FairTax passed.

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Permalink Reply by Dan Hunt on March 12, 2010 at 9:05pm

Maybe I'm missing something but given the purpose of a Roth IRA is to avoid paying taxes on capital gains by not paying taxes when money is withdrawn and The Fair Tax will eliminate all income taxes, including taxes on capital gains, then won't Roth IRA's become obsolete? How can there be a negative impact when The Fair Tax will achieve the same goal as a Roth IRA?

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Permalink Reply by Andy Inness on April 29, 2010 at 5:55pm

One key question is not only on existing accounts. But what to do with future contributions. If you have the choice between a Roth IRA and a Traditional IRA (or 401k of both) if you think that the Fair Tax will pass you should definitely contribute new money to a traditional IRA since that is pre-tax money. If you do a Roth, you will put in after income tax money. But, both will be subject to the same Fair Tax $ in the future (so the Roth would have less total spending power).

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Permalink Reply by Sean Fagan on April 29, 2010 at 10:28pm

Well, certainly an interesting thought, but I would have to ask if it would actually make any difference in the long-run.

Once the FairTax becomes law, I think it would essentially "equalize" the difference between the two different IRA's as we know and understand them today. While the "traditional" one only taxes you on the actual amount of withdrawal (earnings on and contributions remain tax free until withdrawn), the Roth only taxes you on you contributions and not on the earnings.

Given your example, you are correct in advising that we would do better by making contributions to a traditional IRA using pretax dollars in the hope that when those funds are withdrawn there will be no taxes left in effect to pay.

Hmmm, now that I think about it, your advise is very sound. Imagine if you will not having to pay income taxes on the amounts you withdraw from your traditional IRA regardless of your marginal tax rate. For the sake of brevity, let's just say that is 25%. Just think about that for a minute - not only do you get to keep all of your money as you put it in but you will also get to keep all of it when you pull it out as well. Very shrewd and very sound thinking. A "tip of me hat" to you sir.