The only adverse affect would be if the savings rate goes down. Currently, the Roth saves you on tax on the income generated by those funds. But, you have to pay tax on the money you use to fund the account. With no income tax, there would be a greater availability of funds for the average investor. Some of that would be offset by higher product costs. Would people save more?
Traditional IRAs and 401K plans would also be affected if the savings rate goes down. But, a lot of people use these accounts for savings for retirement. Many have gotten into the practice of using IRA accounts. With the questions about the Social Security system, I imagine a lot of people will continue to save.
But, the real windfall will come from those IRAs and 401K plans when people retire and dip into those funds. The funds and the increase in value will be tax free. Seniors and boomers should support the Fair Tax as a way of getting back their money without taxes at a time when they could really use it.
There are three basic retirement accounts
A traditional basic retirement fund (invested in variousprograms) where the principal is "after tax dollars" and the interest/growth is taxed as it is earned. (income tax is paid on ongoing basis only on the growth amount, but will stop when Fair Tax is adopted)
A Roth IRA account is when "after tax" principle is placed into the account. The interest/growth is not subject to any tax when the funds are withdrawn. (No income tax is paid on the growth. It has already been paid on the principal)
A 401-k or IRA account. The principal is pre-tax dollars and the interest/growth are both taxed when the funds are taken out of the account. (This type of account will have no tax when funds are withdrawn after the Fair Tax is adopted.)
ALL funds that are removed from any of the above accounts are currently being taxed again when the funds are spent due to the embedded tax costs in all goods and services, both new and used. Everyone is paying these taxes now. Under the Fair Tax, there will only be taxes paid on the new goods and services.
Hopefully this may help you understand how to explain it. to people. Everyone will save paying income taxes to some degree, but those with funds in a regular IRA will pay the least taxes and those in regular accounts are now paying the most income tax.
The biggest advantage I see the FairTax having on retirement plans, be it a traditional IRA, a Roth IRA, 401K, etc, is that Government with no longer be restricting the amount that can be contributed, or be regulating the withdrawal of funds from these accounts.
The person who has been saving in a Roth IRA will be little worse off than those who have been using the tax defered IRA for obvious reasons, but in the long run, I do not feel that any retirement account will be negatively affected by the FairTax.
After the FairTax is passed, all retirement accounts will be invested like a traditional IRA and withdrawn like a Roth IRA. No income tax on principal or interest at anytime.
The problem i see is that Roth principal has already been taxed. It will be taxed againn when it's spent.
I do see this in part as a problem in perception b/c the money w/drawn today would include the embedded tax costs of the production line - but those aren't perceived as the investor's taxes and this explanation is lost on 99% of folks.
IMO something needs to happen here. In the real world this is the biggest obstacle i face. It's real.
Good point. The same can be said for any savings outside the SEP/401K funds. Bank CDs, stocks, bonds and any other type of investment made with post tax dollars.
A lot of people use the Social Security system as their retirement fund. What's to become of the Social Security system after there are no direct contributions by either the employer or the employee? Will you still have to report your income to keep track of benefits? Will it be phased out? I don't recall reading anything about this aspect.
RC, I have to agree that any negative effect of the FairTax is strictly a perception. As I stated in an earlier post here, the Roth IRA is affected more than the traditional IRA, because of the defered taxes.
One thing you might use to defend the FairTax is that the IRS code can be changed at anytime for any reason, having a far more negative effect on IRA accounts than the FairTax ever will.
"...when you retire under the current tax system, you will be paying 23% in embedded taxes for that new $1 "widget" you buy; when you retire under the FairTax system, you will still be paying 23% in embedded taxes for that new $1 "widget" you buy - except the embedded taxes will now be called the FairTax".
yes i've tired that - in fact that is the most direct path.
the problem is in the perception of double taxation imposed by the nrst. the focus of an individual is his own money obviously. when he sees that my argument is that his investment will be hit equally as hard under the nrst while simultaneously perceiving "double taxation" of it, it's a turn off. ie, what's the advantage to taking this risk then?
Since that money has already been taxed, i'd sure like to see something like the transitional inventory credit but for saved money instead of existing inventory. Whatever is in a qualified plan on date X will be used to calculate a one-time credit to offset tax on it... something.
But the money has already been taxed. By the fundamental tenet of the fair tax, it should not be taxed again. That's like taxing the sale of a home - even though it had been taxed when purchased under the income tax system.
this is one of the deal breakers i run into - and there are only two of those. I'll save the other for another thread ;)
Well, I would like to have a big credit on all the taxes I currently pay on the interest in my after tax savings account as well as the embedded tax on goods I purchase now. That is triple taxation. first when earned, second on the interest and third when it is spent.