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.
I am in favor of the Fair Tax. This ROTH problem is HUGE.
Consider. The best investment today with a decent time horizon is the ROTH IRA. You pay taxes now, you don't pay taxes later. A smart middle age person with middle-class income should always choose the ROTH. Having no other retirement plan (SSI doesn't count for much) I rely on my savings to fund my retirement, as such I am a heavy saver. Currently I have six-figures in ROTH savings, mostly through the conversion of 401K money into ROTH through the paying of the up-front tax. With the advent of the 401K-ROTH and $16,000 annual limits this problem will skyrocket as the education barriers and added complexity (opening a dedicated account) to using a ROTH disappear.
All the people in this thread that think, "Hey, not a big deal. You won't pay taxes wen you take it out and you are already paying the embedded tax anyway", haven't thought this through. Maybe an example will help. $100,000 invested in a 401K to ROTH today will generate a tax of around 28%. I lose $28,000 in exchange for tax-free growth. $100,000 invested in a traditional IRA will result in $28,000 in tax savings. The way the current Fair Tax proposal is written I am $56,000 worse off having made the 'right' investment decision given today's tax law. This is simply insane. Can you imagine the howling of the investor class? I can.
ROTH IRA = Pay Tax upon funding, then pay consumption tax upon use. Double Taxation.
Traditional IRA = Pay NEGATIVE tax on today's income, then pay consumption tax upon use. Net zero taxation.
Not very fair.
This one item alone will doom the Fair Tax and anyone who can't see it hasn't run the math. 100% of the pre-paid tax on a ROTH IRA contribution MUST be returned to the investor. 100% of the tax-deferred contribution to a Tradition IRA was never taxed and the tax MUST be paid. Now I use the word contribution deliberately. If I invest in a ROTH and pay tax on $10,000, and that money grows to $50,000, my tax rebate is for my $10,000 contribution, not my tax-free growth. If I invest $10,000 in a Traditional IRA which then grows to $50,000, my tax should be on the $10,000. This should all happen in the year previous to when the Fair Tax is implemented with our final tax returns.
The mechanism for how this is done can be whatever fair method the economists decide, but the Fair Tax will never pass until this problem has a solution written into the bill.
I spent a lot of money converting my traditional IRA to a ROTH. I also paid penalties because I used money from the IRA to pay the tax and I was not yet 59 1/2. I did this because I was promised my ROTH would never be subject to a federal tax again. The only way the 'fair' tax would be fair to me is if any money I spent from my ROTH was forever exempt from the 'fair' tax or if I was repaid all the money I spent converting my IRA plus any earnings I missed for the years that money could have been accumulating. (Another option would be to make all traditional IRA holders pay income tax on their IRA before the 'fair' tax goes into affect but that is a horrible thought.) This is one reason I cannot support the 'fair' tax.
The FairTax is NOT going to be good news for EVERYONE in EVERY financial situation, but in over 80% of the cases it will be better. Once the FairTax passes there will not be the ability to manipulate Americans and their "money" PRIVATE PROPERTY like is currently done on a daily bases.
The other reality is that HELLOOOOOOO when you spend now or under the FairTax YOU ARE PAYING the imbedded cost of the Federal taxes (payroll....etc.) in the prices. SO whether spend now with money taken out of and IRA or a ROTH or under the FairTax it is going to be approximately the same...the one BIG difference is that w/the FairTax the amount of Federal gov. will be itemized on your receipt, unlike today.
Regardless of your condescending attitude, forever exempting money spent from ROTH IRAs is the only workable way to do this with integrity.
I think that Tos' proposal on 3/12/10 on this thread is the most viable solution.
So if the fair tax were 23%, then the prebate for money withdrawn from a ROTH would be 23% of that amount? hmmm That might work.
All retirement accounts would be withdrawn free of income taxes -- even if taxes are due such as with an IRA. In fact all savings would be free of taxation -- until you spend the money on something that is taxable under the Fair Tax. Don't forget you are paying hidden taxes on everything you buy. When you shop at the store part of the cost of everything you buy goes to pay the store's income tax. This would no longer be the case with the Fair Tax.