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Is Roth IRA Bad for America’s Fiscal Future?

Most personal finance bloggers (this one included) love the Roth IRA. Contribute to a plan with after-tax money, then watch your funds grow unencumbered by taxes. And, when you are ready to withdraw, you don’t have to pay taxes either. But what’s good for the individual might not be good for the collective whole. LA Times columnist Gerald Scorse has damning words for Roth IRA, calling it a “fiscal Frankenstein.” I never thought about it this way, but might my favorite retirement vehicle be bad for America’s fiscal health?

There’s no tax break on contributions. But from that point on, taxes simply vanish. As long as the account is at least 5 years old, there is no tax on any withdrawals made after age 59 1/2. There’s no requirement that you make a minimum withdrawal — after age 70 1/2, or ever.

All of which makes Roths a perfect “fiscal Frankenstein.” In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.

For Roth holders, the accounts become a permanent, federally sanctioned tax shelter. For America, they’re a bit like toxic instruments on the nation’s books.

Scorse acknowledges that the Roth is a good deal for individuals, but that’s not enough. He concludes:

Whatever the answer for individuals, there’s little doubt that Roths are wrong for America. They’re Frankensteins, fated to wreak havoc. It’s time to retire Roth IRAs.

What do you think? Even though I think this retirement vehicle rocks, are Roth IRAs toxic for our nation’s future fiscal health?

  • anon - At first I thought the article was an April Fools' Joke, but then I remembered it's April 11th. Absolutely ridiculous article. ReplyCancel

  • Hedy - Compared to government pay as you go systems, I think the Roth is much better. ReplyCancel

  • Niki - The restrictions as far as your income and what you are allowed to contribute annually in essence protect from abusing the benefit of the tax break. Roth IRAs are a better solution for retirement in America than what will probably be our non existent social security. Both for the individual and America's fiscal health.
    I think companies like GE not paying a dime in taxes is more hurtful, than the middle class getting a tax break for retirement. http://www.nytimes.com/2011/03/25/business/economReplyCancel

  • nicoleandmaggie - Answer: No. Use of the Roth IRA is one of many levers that will allow the government to cut Social Security. Thus saving government money. ReplyCancel

  • paranoidasteroid - This is why contributions are limited to $5000 per year. Because otherwise we'd all shove everything into a Roth IRA and never pay taxes again. What he should be complaining about is the Roth 401K since the contributions are much higher.

    I actually don't disagree with the guy, but I think the point is that not everything has to benefit the government. Sometimes, things can benefit the people. ReplyCancel

  • Aleksie - I can think of several other things that are worse for the US's financial future, and they have more to do with big business and the insanely wealthy getting insanely wealthier. ReplyCancel

  • Kathryn C - If his thesis were a stock, I'd short it.

    ReplyCancel

  • @financialsamura - I'm very against the ROTH IRA. Here's my viewpoint. I may have to re-highlight it!
    http://www.financialsamurai.com/2010/01/11/be-a-s

    Cheers, Sam ReplyCancel

  • keerthikasingaravel - He has a valid point. But I don't think the Roth IRA will greatly influence the final outcome in America in any great way.Maybe its not my place to say it as I'm not American, but too many other things are wrong with the American Economy for the Roth IRAs to be such a problem.America needs a monetary policy overhaul rather than a fiscal policy overhaul.The American Government is going after easy targets and playing to the gallery rather than facing upto unpleasant tasks. ReplyCancel

  • Christine - The idea that the "people" and the "country" have separate identities is disturbing. The country IS the people. If the citizenry is well-off financially, wouldn't the government be able to scale back programs like welfare, Medicade, etc.? ReplyCancel

  • Bits & Pieces 4/14/11 - [...] Heeled asked, Is Roth IRA Bad for America’s Fiscal Future? Obviously the answer is yes, but it’s good for those of us who take advantage of [...]ReplyCancel

  • First Linkfest | KATHRYN'S CONVERSATIONS - [...] are bad for America, ridonkulous. What next, air is bad for America?  Well Heeled does a great job outlining the key points and her thoughts, but Well Heeled doesn’t seem swayed, [...]ReplyCancel

  • Pat S. - The government gets enough out of most of us in income tax alone, despite tax breaks from retirement plans.

    I can see your point, but the fact is that by the time most of us retire, these plans may be all we have left, and as Americans we have the right to our own property, and we have been guaranteed the right from double taxation.

    Wealth has never been taxed, and never should be. That would discourage the tenets of the entire capitalist system. ReplyCancel

  • Ryan - I think Sam has a great perspective on this, and I agree with most of his points, but I do think from an individual standpoint that they're an option that any investor should consider. Even though a traditional and roth ira both earn the same (all things equal) the roth still offers other advantages (early withdrawls) that aren't found with other vehicles. Interesting take on the big picture. ReplyCancel

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