In his speech to Congress this week, Fed Chairman Ben Bernanke said: “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”
If you think about it, his comments make perfect sense and you will see that he has pretty much defined the options if you don’t consider super high inflation a viable policy choice. Now if you look at the options he lists, you may come to the judgment, as I did, that cuts in entitlement programs are not politically probable, given the aging trends of the voting population. You will also likely conclude that cutting education spending when more and more of our kids are graduating without the ability to read or write correct English is not a viable option for either political party. That leaves defense cuts and tax increases. Last month Obama submitted a defense budget request that asked for an additional $33 billion to further finance the wars in Iraq and Afghanistan with indications future budgets will ask for more, so that doesn’t seem likely anytime soon.
Guess what, folks, that leaves tax increases as the only choice left.
That get me to the tax planning idea for your consideration (aside from the obvious one of accelerating income into 2010 from 2011 where possible): The law that enables conversion of regular IRA accounts to a Roth IRA in 2010 at 2010 tax rates. This may be an excellent opportunity to move the remainder of your old regular IRA accounts into a Roth account, pay the income tax now, and avoid the higher taxes that are almost certainly to apply to distributions in later years. Remember Roth IRA distributions are free of income tax because you paid the tax when you made the contribution, and you get a free ride on the earnings accumulation. There’s a good short article on the rules for this, including some deferral options for those who anticipate a big income this year, at http://www.goodfinancialcents.com/2010-roth-ira-conversion-rules/.
Think about it: If your regular IRA has accumulated contributions and gains totalling, say, $250,000 over the years, and you’re in the 25% tax bracket now, a move to the 28% tax bracket could cost you an extra $7,500 in taxes when you take it out, unless you do it this year. It’s OK, no need to thank me. Really.
As always, I welcome your comments.