In this "What's Up, Bro" segment from the episode of Motley Fool Answers, Alison Southwick and Robert Brokamp talk about one of the pillars of modern retirement planning: the Roth IRA. Starting with the Individual Retirement Account's birth in the Employee Retirement Income Security Act, they trace its evolution, discuss its importance, and consider its future.
A full transcript follows the video.
This video was recorded on Jan. 23, 2018.
Alison Southwick: So, Bro, what's up today? We asked you guys to give us some advice on what to name this new segment, and Alex on Twitter suggested we go with, "What's Up, Bro?" or "What's News?" I kind of like the idea of just being, "So, Bro, What's Up?" So, thanks, Alex, for suggesting it.
Robert Brokamp: Basically, this is whatever we've been reading over the last week, and the thing I liked the most was entitled, "Happy 20th Birthday Roth IRA!" It was from irahelp.com, the website of Ed Slott, who is generally considered the world's premier expert on IRAs. And I didn't really think about it, but it is the 20-year anniversary of the launch of the Roth IRA.
Just so we all are on the same page, what's great about the Roth is contributions are not tax-deductible, but as long as you follow the rules, the money comes out tax-free, as compared to the traditional, whereas when you put the money in, you'll probably get a deduction, but you have to pay taxes on the way out.
It's a good time to think about the Roth IRA because with the Roth IRA you've given up that deduction, but because of the new tax law, tax rates are lower, so deductions are worth less. So, it's a good time to think about whether you should contribute to a Roth IRA. Since it's its 20-year birthday, let's go a little bit into the history of the Roth IRA.
Southwick: Oh, this is going to be riveting.
Brokamp: It's going to be exciting. So, it starts with the traditional IRA which came first. It came out in 1974 due to a law called the [Employee] Retirement Income Security Act. Back then, you could not contribute to an IRA if you had a plan at work. That changed in 1981 due to something called the Economic Recovery [Tax] Act of 1981, but it was also known as the "Kemp-Roth Tax Cut," sponsored by...
Southwick: So, Roth is a person, not an abbreviation.
Brokamp: Exactly. It was sponsored by Jack Kemp, the congressman from New York, but also William Bill Roth, a senator from Delaware. It lowered the tax rate from 70% to 50%, so that gives you an idea of what tax rates used to be. Now the top rate is 37%. But it also made IRAs available to everybody, whether you had a plan or not. It was still the traditional IRA, but it started with that.
Roth, himself, was always concerned about retirement security. He grew up during the Depression in Montana. He became interested in politics because he was not an athletic kid, so in his free time he would hike to the capitol and watch legislators in action. He served in World War II under MacArthur and then went to Harvard for both business school and law school, thanks partially to the GI bill, moved to Delaware in 1954, and was elected to Congress in 1966.
The idea for what became known as the Roth, that he called IRA Plus, came out in 1989. It was not until the Taxpayer Relief Act of 1997 that it became law, but it didn't become available until 1998, which is why we're now celebrating 20 years of the Roth IRA.
Southwick: And I should point out to our listeners that you did not look at your notes at all. That was insane. You just spouted off so many stats and dates.
Brokamp: It's true.
Southwick: It's all in that noggin of yours.
Brokamp: It's all in that head of mine. So, it becomes law. Unfortunately, it didn't help him with his election because he got voted out of office in 2000. He died in 2003, three years before the Roth 401(k) became available to people. He was known as a mild-mannered guy. Not actually a great public speaker, so he would bring a St. Bernard with him wherever he was campaigning. That way kids would come up to pet the dog and then he had an opportunity to talk to the parents. He served as a senator alongside Joe Biden for years and at his funeral Joe Biden said Bill Roth was the "guy I trusted most in public life." So, he seems like a pretty decent guy, and we have a great account thanks to him.
According to IraHelp.com, 25 million American households now have a Roth. Ed Slott, the founder of that website, tweeted out earlier this month, "I look at a Roth IRA as tax insurance. Once you pay in, you're protected against future tax hikes." It's something to consider, so happy birthday, Roth IRA and many more years to come!