Wednesday, May 03, 2006

Roth IRA for the wealthy

There is a bill that is currently going through congress that would allow high-income taxpayers to convert traditional IRAs into Roth IRAs. Apparently, the current $100,000 income limit on such conversions will be suspended for 2 years (WSJ, 5.3.06) if the bill is approved. Now, while this legislation will not affect me as my income is below this ceiling and I already contribute to a Roth IRA, I totally support this type of tax legislation. I just don't agree with the message from tax policies that seem to penalize people with higher incomes by taxing them more and/or not giving them the same access to tax-benefits (for example, income limits on Roth IRAs). The message seems to be, "The higher the income that you earn, the more you will get taxed/penalized". Look at the alternative minimum tax.

So legislation like this that removes income ceilings seems and allows wealthier individuals to access the same tax-benefits as everyone else seems fair to me. Of course, the downside will be to figure out how the government will be able to make up for some of the lost tax-revenue that will result from any tax cuts. Unfortunately, given the current state of affairs with worsening deficits, low savings rate, foreign dependence on oil, weakening dollar, the rise of China and India, aging population and slow erosion of social security, we may be in for some serious sacrifices and more than likely, possibly higher tax rates. All the more reason to convert to a Roth IRA if you haven't already done so.
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