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What If Congress Reneges on Roths?


Roth IRAs have been a popular retirement investment vehicle since their introduction in 1998. Taxpayer interest in Roth accounts has increased further in recent years due to the 2006 changes that made Roth 401(k) and 403(b) plans available regardless of a taxpayer's adjusted gross income (AGI), and the scheduled 2010 repeal of the $100,000 AGI limitation on traditional-to-Roth IRA conversions. This article analyzes the decision to invest in a Roth IRA versus a traditional IRA, given the possibility that Congress might renege on the tax-free treatment of Roth accounts. The analysis reveals how small the probability of reneging must be in order for a Roth account to have a larger expected after-tax future value than a traditional account, described as the "break-even probability." CPAs should use the results to complement -- but not replace -- their professional judgment in practice.

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