FairTax and Roth IRA's....

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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one only taxes you on the actual amount of withdrawal (earnings on and contributions remain tax free until withdrawn), the Roth only taxes you on you contributions and not on the earnings.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would do better by making contributions to a traditional IRA using pretax dollars in the hope that when those funds are withdrawn there will be no taxes left in effect to pay.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.

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