If you’ve gone to the movies recently, you may have seen the trailer for the upcoming movie ‘2012’. If you don’t know, it essentially is based on the legend that the Mayan calendar ends on Dec. 21st, 2012, which some have come to believe that the world will end on that date.
Well, I don’t know about you, but I can tell you this – finances would be MUCH simpler if the world did end in 2012. After all, we just need our money to last until that date and afterwards it won’t matter.
But just in the off chance that we live past 2012, there is another important date out there – 2010.
Why? The IRS is allowing people, regardless of income, to convert their traditional IRAs to Roth IRAs. This, as tax law changes go, is huge!
What does this mean? Well, for one, you can lock in today’s income tax rates and guard against future income tax increases.
How?
Upon conversion, you would pay income tax on the balance of your IRA at today’s tax rates – which for many middle class people is 25%.
But in the future, you can withdraw your money tax free (after age 59 1/2 and at least 5 years since account opening) – since Roth IRAs have that feature.
And you may be able to create tax free income that you can’t outlive.
But will my taxes be higher in the future?
The expectation that tax rates will be lower in the future, I believe, is a myth. Simply look at all of the bailouts, pending deficit in Social Security, health care (Medicare) costs – on top of the massive budget deficit we have already.
To give you some perspective, current tax rates are at a historic LOW. In the 1970’s and 1980s, the highest tax rates were over 50% (today is 35%) and at the end of WWII, the top bracket was taxed at 94%.
But remember that your income in retirement – Social Security, traditional IRA and 401(k) withdrawals, interest from investments – are all generally taxable at whatever tax rate is at that time!
But my IRA is down a lot because of the market last year so I don't want to sell.
Use this to your advantage. Since you would pay taxes on your conversion, the fact that your account may be down means you’ll pay less in tax now. Yes, I know this won’t magically make your account balance grow to where it was, but at least it’s something.
Go catch ‘2012’ at the theater, but pay attention to 2010.
Please consult your own financial and/or tax advisor for specifics of your situation.
Answer to last week’s trivia question: C -37%
This week’s trivia question – What is the average age of Americans who receive disability payments from Social Security? Is it?
A – 23.5
B – 39.25
C – 52.6
D – 68.9
