by Jeff Schneider, CPA
I grew up reading Mary Shelley’s Frankenstein. It was one of those fantasy books that I would have never considered valuable to everyday life. Years later, this phrase has started to be muttered in frequent chatter among our famed Washington representatives.
Yes, famed may be used a little tongue in cheek as there is slight humor that these “public servants” find a reason to fill nightly news, destroy business and ruin an economy in just 102 days of work per year. But I digress…
Back to Frankenstein. Some politicians have been calling Roth IRAs a “fiscal Frankenstein” since 2011. They argue that allowing tax-free accounts is a major loophole for the long-term tax collection prospects for the government.
And they’re right. During the continuous faux fiscal cliff negotiations of the past two months, there were many discussions of “closing tax loopholes”.
So logically, a loophole that’s already named Frankenstein was at risk. We rushed many clients through their Roth conversions (and saved them lots of money) before year-end to beat any law changes.
Yet after reading the American Taxpayer Relief Act passed on New Year’s Day, I recognized the loophole GOT BIGGER.
The fiscal cliff means that the government has short-term needs (and we all know they don’t focus on the long-term).
But who thinks long-term?
You do.
Rather than closing the loophole, Congress estimates it can collect an extra $12 billion by expanding the current Roth conversion laws to 401(k) plans.
To recap on the existing law. In 2009 and earlier, only individuals with income less than $100,000 could convert to a Roth (including the income they claimed due to the conversion). Beginning in 2010, you have been able to convert to a Roth without worrying about any income limits.
When you convert $50,000 from a regular IRA or 401(k) to a Roth, you will have claim that as income in the current year. It does bring forward some taxes on money you’ve accumulated on several years of savings.
Congress has estimated these “early” tax payments to add $12 billion in revenue over the next decade.
It feels a little counter-intuitive because you’re paying taxes a little early, but this is an opportunity that can’t be missed.
You can now fix your tax rate on retirement savings. Forever.
Whether you have a 401(k) or an IRA, you can pay no more taxes on those accounts, ever…for you or your heirs.
That’s an extremely powerful estate planning tool.
Why wouldn’t you want an account that is tax-free for the next 100 years? You can then completely ignore the happenings in Washington, knowing you’ve paid your “fair share”.
Sure, tax rates have increased on the highest earners, but we’ve noticed that many still see a great opportunity to convert to a Roth. No need to convert 100% of your IRA immediately. If possible, convert it slowly, over time to manage your income under the upper limits ($250k).
Roth IRAs are strong in 2013 and I can’t wait to see this baby Frankenstein grow-up.
You may not want to wait too long, though. This beast won’t last forever. At some point, Congress will figure out that Frankenstein has turned on them. I can’t imagine it will be in the next few years, but a day early is better than a day late.
Good investing,
PS. Terry Coxon’s Unleash Your IRA enables people to invest in all of the alternative asset classes above…except one.
Thousands have found the information valuable and taken action on more actively controlling their retirement accounts.
I encourage you to pick up a copy of it here.