Today, they offer some of the best tax advantages of any retirement account—but will Roth IRAs be taxed in the future?

Key Takeaways

  • Despite periodic rumblings out of Washington D.C., Roth IRA distributions probably won’t be taxed.
  • You already pay tax on your Roth IRA contributions the year you make them.
  • Taxing Roth IRA withdrawals would effectively kill the accounts and the investment capital they provide the national economy.
  • Other retirement plans would be a much richer source of tax revenue.
  • Even if taxation occurred, current accounts would probably be exempted.

An ongoing fear exists that Roth IRA withdrawals might somehow be taxed in the future. The U.S. government's budget deficit problems began stoking the issue's flames back in the early 2010s.

More recently, the tax reform legislation of 2018—which decimated a lot of itemized deductions and eliminated the ability to undo traditional-to-Roth-IRA conversions—just added fuel to the fire.

Under current tax law, you can withdraw contributions and earnings tax-free as long as you're at least age 59 ½ and it's been at least five years since you first contributed to a Roth IRA.

5 Reasons Roth IRAs Won’t Be Taxed

The rationale for speculation over taxing Roth IRA withdrawals is that such a tax break may be far too generous. Other tax-sheltered retirement plans, after all, are merely tax-deferred—meaning you’ll pay taxes on them eventually. Roth IRAs—or at least their earnings—are effectively tax-exempt.

But as much as taxing Roth IRA withdrawals may seem inevitable at some point, there are at least five reasons it probably won’t happen.

1. Roth IRA contributions aren't tax-deductible

You pay taxes on your Roth IRA contributions. When you deposit money into your Roth, you do so with after-tax dollars. So, you don't get an upfront tax break, but qualified withdrawals are tax-free.

In contrast, you make contributions to traditional IRAs with pre-tax dollars. If you meet income limits, you can deduct your contributions when you file your income tax return. That lowers your taxable income for the year and saves you money on your taxes. Since you get this upfront tax break, you pay taxes later, when you withdraw funds from a traditional IRA.

2. Roth IRAs help build the nation

We might like to believe the primary purpose of establishing tax-sheltered retirement plans is to help people prepare for retirement. But there are other factors that operate at a much more macro level.

In general, every nation needs a capital base on which to build and expand its businesses and industries. That means somebody somewhere needs to be saving money that will eventually find its way into investments like stocks, bonds, and real estate (to name just a few options). Also, large federal deficits mean there has to be capital in existence to buy the government’s debt.

41%

The number of Americans who own a traditional or Roth IRA.

However, Americans are notorious for being non-savers—except in tax-sheltered retirement plans. No matter what methods the government may attempt to raise tax revenue, retirement plans are likely to retain their favored tax status.

Favorable tax treatment is the entire reason why anyone invests in a retirement plan. If the tax benefits go away, so do the plans—and a big chunk of the nation’s capital base. And that would lead to even bigger fiscal problems than we have now—which leads us neatly into the next reason why Roth IRA withdrawals are unlikely to be taxed.

3. If withdrawals are taxed, it will end Roth IRAs

If Roth IRA withdrawals were taxed, it would almost certainly kill the program. Tax-free withdrawals are the "special sauce" that seasons this investment dish. Take it away, and you’re basically left with just another tax-deferred savings account. And we already have several of those.

The Roth IRA program is growing rapidly, making ever-larger contributions to the nation’s much-needed economy. We can rest assured the government has no interest in ending the program, which is exactly what will happen if withdrawals are made taxable.

4. Roth IRAs are a comparatively small tax base

Although they are increasingly popular, Roth IRA plans remain a relative lightweight in the retirement-plan lineup. They’ve only been in existence since 1997. And in dollar terms, the annual contribution limits are relatively low.

For 2019, the most you can contribute to a Roth IRA is:

  • $6,000
  • $7,000 if you're age 50 or older

The 2019 Roth IRA contribution limits represent the first increase in six years.

Compare that to 401(k) plans. They've been around since 1974, and the 2019 contribution limits are $19,000 ($25,000 if you're age 50 or older)—plus employer matches.

If your employer adds a match, it doesn't count toward your contribution limit. But the IRS does cap the total combined contribution limit (yours and your employer's) for 401(k)s. For 2019, that's:

  • $56,000 if you're under age 50
  • $62,000 if you're age 50 or older
  • 100% of your salary (if it's less than those dollar limits)

If the government were to look for tax revenues, 401(k) plans would offer a much richer source.

5. Even if Roth IRAs are taxed someday, participation up to that point will likely be grandfathered

How can we know this for sure? Just read the tax code—it’s filled with special provisions. Look for the prefix “pre-” followed by a date, or “post-” followed by a date. You can find them all over the IRS regulations. 

Whenever these words appear, it usually means that a special allowance has been made for anyone who participated in a program before or after the laws or regulations were changed. This will almost certainly be the case if Roth IRA withdrawals are made taxable at some point in the future.

The Bottom Line

Based on what we know today, continue funding your Roth IRA—and do it with confidence. If you haven’t started saving with a Roth IRA yet, research and open an account today. Your future self will thank you.