The Prohibition Era kicked off in January of 1919 with the ratification of the 18th amendment to the Constitution. The amendment banned the manufacture, sale, and transportation of “intoxicating liquors,” essentially making alcohol illegal (until 1933 when the 18th amendment was repealed by the 21st amendment).
There were two groups of people that were particularly supportive of the 18th amendment. And they weren’t groups that you’d expect to be on the same side of an issue—the Baptists and the bootleggers.
The Baptists, of course, wanted alcohol to be illegal because of the destruction that they believed it wrought on society.
The bootleggers, on the other hand, were already selling alcohol illegally, and knew that business would be booming for them if legal sales were outlawed.
And so, these two groups fought tooth and nail for the same political outcome, albeit for completely different reasons.
There’s a similar phenomenon at play when it comes to tax planning in 2023.
People often ask me, “Is there a chance that Roth IRAs will eventually go away and we won’t be able to contribute to them anymore?” On its face, the question is logical.
Consider the thought process that someone might go through in deciding whether to contribute to a traditional IRA or a Roth IRA. Suppose they’re currently in the 22% tax bracket. A contribution of $5000 to a traditional IRA would lower their tax bill by $1100 in the current year. And if that $5000 is invested in the market for the next 20 years, it’s likely to quintuple and become at least $25,000, all of which would be taxable income upon withdrawal.
On the other hand, contributing that same $5000 to a Roth IRA provides no tax break in the current year. However, that $5000 grows tax free, meaning that the $25,000 down the road can be withdrawn without paying any taxes.
So the trade-off is simple: would you rather save $1100 in taxes now, in exchange for $25,000 of taxable income later (at tax rates that we can’t predict), or would you rather pay the $1100 now and have $25,000 tax-free later.
Most people will assess those numbers and determine that they’re better off to pay the taxes now because they’ll pay much less in total taxes over the course of their lifetime.
And if the assumption is that politicians want the most tax revenue possible, it’s logical to ask, “Won’t they try to take away my ability to contribute to a Roth since that will actually cause me to pay less in taxes over the long haul?”
But politicians are much more short-sighted than that. Nobody currently in Congress really cares about tax revenue 20-30 years from now. They’re much more interested in maximizing tax revenue in the current year to help pay for all of the asinine spending that they propose. Tax revenue three decades from now is someone else’s problem.
So they’re more than happy for you to contribute to a Roth.
You can like the Roth because it saves you money in the long run. And your congressman can also like the Roth because it makes him more money now. It doesn’t matter that you and he like it for completely different reasons—it only matters that you both like it.
And while it’s certainly possible that something unforeseen could happen, it’s very difficult to imagine a scenario where Roth IRAs go away, thanks to this odd alliance of modern day Baptists and bootleggers.