Are Roth IRA assets safe from Washington's revenue hunt?

AMT could provide backdoor access to Roth IRA gold mine
DEC 13, 2012
As Washington wrangles over where and how to hit the electorate with another tax as part of the fiscal cliff debates, one can't help but wonder about the future of the growing pile of assets packaged as Roth IRAs. Granted, in Washington dollars, the $270 billion in total Roth IRA assets is probably seen as small potatoes in the context of the current fiscal mess. However, with lawmakers already threatening to renege on promises made in areas such as muni bond tax exemptions, the handwriting might be on the wall for the future of Roth IRA assets. Keep in mind that the major appeal of the Roth IRA, as originally established in 1997, has been the ability to withdraw assets in retirement tax-free. While it is difficult to imagine Congress pulling the rug out from under investors who are now contributing nearly $20 billion a year to Roth IRA accounts, there is at least one plausible threat to Roth retirement income. Not to sound too paranoid and not to give Congress any ideas, but it is conceivable that Roth IRA assets could eventually become part of the preference items that trigger alternative minimum tax liability. “We are entering a pretty hostile climate from a tax standpoint and there's certainly a perception that the wealthy have been using vehicles like the Roth to try and take advantage of the system,” said Kevin Ghassomain, partner at the law firm of Dinsmore & Shohl LLP. While Mr. Ghassomain does not believe Congress would ever have the “chutzpah to start directly taxing Roth IRAs,” he does believe Roth accounts could eventually become a part of income or net-worth calculations related to the AMT. He cited, as an example, the 0.9% tax applied to ordinary income and the 3.8% unearned income tax from Obamacare that apply only to individuals with incomes of at least $200,000. “Perhaps there will be an income threshold related to Roth IRA assets that will be part of the AMT preference items,” he said. “Let's face it, if you're in the top two tax brackets you have to be concerned with all of the above.”

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