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Roth IRAs: What was Congress thinking?

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I attended a conference yesterday for practitioners and academics to determine the requirements for software that would help advisors make recommendations for taxwise decisions about timing retirement withdrawals from all the various investments (401(k)s, Roth IRAs, brokerage accounts, personal residences) their clients hold.

Things I learned:

1) These decisions have a huge impact over how much money people and their heirs end up with and are important to think about.

2) The calculations required to make these decisions are really hard, even for the country’s top financial professionals, and not always intuitive.

3) There were people of all political persuasions in the room and EVERYONE thinks tax rates are going up, way up. As someone said, if taxes were a stock, they would be rated a long term “buy”.

4) The Roth IRA / 401(k) can be great for people of even very high incomes.

5) Congress will allow unlimited conversions to Roth IRAs from regular IRAs in 2010. Currently, you can only do this if you earn less than $100,000. This is a fabulous opportunity for our clients but will be very costly for our nation’s finances without any obvious public benefit.

When you convert to a Roth, you have to pay the taxes on all the income that was sheltered in an IRA, but you and even your grandchildren who inherit that money never pay tax again on any investment or dividend income. You pay $1 today to avoid $2-$30 of tax in the future.

Even though Congress gives up a huge amount of revenues in the future, it still loves this idea because all its budget calculations are done on a 10 year basis. They get all of the benefit from people writing checks to the IRS today without having to account for the taxes people will avoid paying 10-100 years from now. When they passed the provision, they were able to count it as a revenue raising measure.

According to this New York Times article, this one little obscure tax law could cost over $50 billion when all is said and done. I guess we can just add unlimited Roth conversions as reason #932 that tax rates will be headed north.

Anyway, if you are our client, and you got a notice from the HR department about a new Roth 401(k) option and shoved it into a desk drawer, pull it out and give us a call.

If you happen to be a member of Congress, you need to consider revisiting the Roth conversion idea.

As always, everyone’s financial situation differs and you need to consult your own advisor.

Topics: Financial Planning, Investments, Retirement policy | Comments Off on Roth IRAs: What was Congress thinking?

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