The Federal Reserve and the Roth IRA

There is a good quick history of Banking in America and the Federal Reserve Here.

What is interesting about this timeline is that it easy to see that America has been struggling with our banking system since our very inception. Every few years, and at most twenty, we dramatically alter our banking laws to deal with a crisis. In fact, crisis is the most consistent characteristic of our banking history.

The other fixed characteristic is speculation and the lending of money for interest. A recent trend in society is the investing of savings to protect oneself from inflation. The government funds pensions with an interest return, and insurance companies presume an interest return when plotting their rates. Adjustments to the rates of return, and especially a downturn in the market, ripple through the entire economy. It is a wave of misery that everyone is unable to stop. People lose their businesses, their jobs and put off retirement. Public funding for schools, roads, and social services always end up getting cut back at a time when they are needed most.

To get an idea of how distorted the banking laws are, take for example the Roth IRA. The Roth IRA was a way to make gains from investments tax free. Essentially, by filling out a form, you are exempted from contributing to the Federal Treasury. But that is not the worst of it.

If you lose money with your Roth IRA, you can also make an adjustment for the loss. Basically, what this means is that if you lose money, the Feds cover part of your bet. And, if you make money, you have no obligation. This is pretty much a double screwing for those who have no surplus wealth. While this is probably touted as a savings for the middle class, in reality it makes everyone subject to even more wild swings in our economic life.

To get more information about the Roth IRA visit this site.

Here is an example of what you will find there:

“Can you help me? I converted my IRA to a Roth in 1998 when it was worth $100,000. I elected to pay the tax over four years, so I’ve paid tax on $50,000 and I still have to report $25,000 a year on my 2000 and 2001 tax returns. The problem is that the Roth is now only worth $20,000. Can I undo the conversion?”

This question, or a variation of it, has become very commonplace due to the current stock market. While the simple answer is that the law states that it is too late to recharacterize a 1998 (or 1999) Roth conversion, it is possible that the IRS will still permit a late recharacterization based upon these circumstances. The request to the IRS has to be in the form of a formal ruling request and while there is no guarantee that the IRS will issue a favorable ruling, it could be worth the expense of trying. Alternatively, there may be a way to at least partially salvage the situation. Whether it pays to do so will have to be evaluated on a case-by-case basis, since everyone’s numbers are different.

What I want to point out is that the guy lost $80,000.00 and he is worried about not paying more taxes. He is living in a world of make-believe. It is common on the political left to blame corporations and the wealthy, what the left fails to realize is that they too are blind. The idea of “socially responsible” investing will never work because it follows the same pattern of speculation. The banking system is fundamentally flawed.

Recently there was a hurricane off the coast of Florida. As a result, a lot of people were dumping their insurance stocks. This is a micro-view of what is wrong with the system. At the point where the banking system should be providing strength, it instead provides weakness. The stock price plummets, and the insurance company is weakened before the storm even hits land. It is the ultimate system of pass the buck and we are all trapped in it, rich and poor alike.