The recently passed healthcare reform legislation is still generating quite a stir. Many people are so focused on the health care component that they do not realize that the law includes an investment income surtax provision. This surtax will be used to expand the healthcare benefits that will be provided by the government.
The tax will be levied on individuals whose annual income is $200,000 or greater and married couples filing taxes jointly who earn $250,000 or more per year. Investment income like capital gains, dividends, and interest income will be subject to the 3.8 percent surtax. However, interest on municipal bonds and income and distributions from Traditional and Roth IRAs as well as 401(k) plans will be exempt from the surtax. It is important to note that the income gained from a 401(k) and Traditional IRA may boost total taxable income into the bracket subject to the surtax.
The Roth IRA is funded with post-tax contributions and its distributions are exempt from taxes when taken in retirement. This makes the Roth an attractive alternative to those eligible to contribute and wishing to escape the surtax. The time is right for these folks to open up a Roth IRA.
Another train of thought is how the healthcare reform may affect retirement plans in general. Now that most employers will be required to either offer health care or make a payment to the government, will the same laws soon pertain to retirement plans? There is also concern that as the cost of health care increases, the amount of employee and employer money available to fund retirement plans will dwindle.
The recently enacted healthcare reform law will provide uninsured Americans with much-needed healthcare coverage. However, it will also result in a surtax on investment income of high wage earners and who knows what additional changes to retirement plans will follow. These are the sacrifices that must be made in order to fund the healthcare initiative and they may make investment in a Roth IRA a great alternative for some.