What BAB backpedal says about Roths

Nov 18, 2012 @ 12:01 am

Of all the fiscal-cliff-related topics being kicked around, the proposed reduction in the federal subsidy to the Build America Bonds program might be the most illustrative of how Washington works and politicians think.

And it should worry investors who have put money into retirement savings vehicles that come with tax-free guarantees.

Introduced in 2009, BAB was designed to help municipalities issue debt for crucial infrastructure projects. To draw investors, BAB stripped the tax-exempt-income component.

To offset that loss, so-called Direct Payment BAB paid a higher interest rate, with the federal government providing a 35% subsidy to issuers to help pay the extra interest. As BAB wasn't offering tax-free income, the subsidy was considered revenue-neutral.

The program ended in December 2010 after $181 billion worth of BAB was sold. There was support for bringing it back.

Then, two months ago, a report came from the White House that included a proposal to cut the BAB subsidy to 32.3%.

In the swelling fiscal cliff debate, such a small cut might seem simple. But the bigger point is that the proposed reduction comes less than two years after the same people introduced and committed to the subsidy.

If Washington can't keep a promise for two years, how is anyone expected to feel comfortable investing via something such as a Roth individual retirement account, which requires that investors trust that the government will allow tax-free withdrawals decades from now?

And what happens if states run into another financial bind? Lawmakers and governors could be tempted to dip into the massive pool of 529 assets to help bail them out.

jbenjamin@investmentnews.com Twitter: @jeff_benjamin

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