David prefers to be a clear-eyed realist and face things head on, mincing words about the fiscal situation of the United States would be a disservice to everyone. One of the big things that people have asked about after the previous episode is whether shifting all their money to tax-free will do anything for them. If the situation is so bad, what’s to stop the government from taking these programs away?
There are two traditional approaches to retirement and taxation, namely, the government is going to tax you either on the seed or the harvest. That is to say, either preretirement or postretirement. In order for the government to tax your Roth IRA, they would have to completely abandon the very paradigm they have forced you to submit to, which would likely lead to chaos in the streets.
When you add up the cumulative Roth IRA’s and 401(k)’s of Americans, it adds up to about $800 billion. When it’s compared to the cumulative amount in traditional IRA’s and 401(k)’s, approximately $23 trillion, it doesn’t make much sense for the government to violate a principle they’ve established because the total wouldn’t have much of an impact on their fiscal situation.
It would be much easier for the IRS to do what they’ve done in the past, namely to raise taxes on the pot of money that is owned by the people they are in a business partnership with. It’s legal, they’ve done it before, and as money grows in shorter and shorter supply they become more likely to do it again.
If you have a Roth IRA, they will likely prevent you from contributing to it at some point in the future, but the risk of taxing these accounts would probably be too great to justify the action.
L.I.R.P.’s will probably go away at some point in the future. As the US approaches the point of no return, the federal government will be looking at all options to increase revenue and they’ve already looked at removing the L.I.R.P. in the past.
George W. Bush sought to level the tax playing field in the early 2000’s which reveals a key principle; specifically, whenever they change the rules whoever has the bucket gets grandfathered in. If history serves as a model, if you already have an L.I.R.P., you will get to keep it and continue contributing.
This creates even more urgency for people who don’t yet have an L.I.R.P. to get one and get it secured soon. The greatest tax benefit in the US tax code is the tax benefit for life insurance. If the country is going broke, as we are, they will not allow these benefits to exist in perpetuity.
If the past is a prologue, we can look to history and be confident that we can continue with these programs and keep contributing to them for the rest of our lives.
Don’t worry too much but do face the situation head on. There are places in our country that you can safeguard your money against the inevitable and dramatic rise of tax rates in the future.