Honoring Expectations About Taxes: Are Roth IRAs Different?

Abstract:     
Beginning in January 2010, taxpayers may convert balances in traditional IRAs into tax prepaid Roth IRAs. Those who decide to do so will be relying on current law that allows the payment of a tax now to replace any future income tax on the earnings within the Roth IRA and on withdrawals therefrom.

In this paper, I explore whether these taxpayers should be afforded any exception from the generally accepted idea that changes in tax laws that affect pre-existing investments raise no special concerns. I conclude that although the Roth IRA holder, especially of the Roth IRA holder who has converted a traditional IRA into a Roth IRA through the prepayment of income taxes on the account, is qualitatively different from most investors facing tax changes, this difference gives rise only to political, and not constitutional, concerns.

I further conclude that the current Congress would be wise to remove the ability of current IRA holders to convert their accounts into Roth IRAs, and thus to minimize the political challenge future Congresses will face given the expectations of the holders of such accounts.

Keywords: IRAs, Roth IRAs, tax-preferred savings, retroactivity, contract clause

working papers series