Why consider a Roth IRA conversion in 2014?

As a taxpayer, one does not have any control of what future tax rates will be under any new tax law. The highest marginal federal income tax rate was: 94 percent in 1944 and 1945; 91 percent from 1946-1951; 92 percent from 1952-1953; 91 percent from 1954-1963; 77 percent in 1964; 70 percent from 1965-1981.

When I passed the CPA national CPA exam in November, 1979, the highest federal tax bracket was 70 percent. Under President Reagan, The Economic Recovery Tax Act of 1981 eventually lowering the maximum 70 percent rate to 50 percent from 1982-86.

The maximum rate was 38.5 percent in 1987; 28 percent from 1988-1990; 31 percent from 1991-1992; 39.6 percent from 1993-2000; 39.1 percent in 2001; 38.6 percent in 2002; and 35 percent in 2003-2012. The American Taxpayer Relief Act of 2012, signed by President Obama on Jan. 2, 2013, raised the maximum federal income tax rate to 39.6 percent, starting in 2013.

The maximum federal tax rate hit historic lows in 1988-1990 and has been going up ever since.

A Roth IRA conversion means that one pays the tax on one’s traditional IRA, 401(k), 403(b), 457, or any other IRS-approved tax-deferred retirement account now, but can earn unlimited amounts without tax for the rest of your life.

I regularly see retired couples with total incomes of $100,000-120,000 who are paying only $10-14,000 of total federal income tax. Before 1981, they would have paid at least twice as much. In essence, taxes are “on sale” right now, compared to the probable future rates.

Why Are Tax Rates Likely to Increase for the Future?

The federal government has had a budget deficit totaling about $6.03 trillion from fiscal year 2009-2013, or an average deficit of $1.206 trillion over this 5-year period. The Great Recession, was partly caused by housing prices declining by over half from 2006 to 2011 in states such as AZ, CA, FL, and NV, In many parts of the country, housing prices have still not recovered to their 2005-2006 peak values. Tax revenues were cut, but the federal government increased spending, including the infamous The Emergency Economic Stabilization Act of 2008 (passed and signed into law on October 3, 2008). This was commonly known as the $800 billion bailout of Wall Street, Big Banks, Detroit automakers, and state government union employees.

After the 2008 Stock Market Crash officially started The Great Recession, over 10 million jobs were lost.

This decreased many Americans’ incomes and net worth as many raided savings to cover living expenses. Although there has been a slow economic recovery, labor participation rates have been at historic lows. Many millions are either unemployed; working part-time instead of their desired full-time work status; or have given up looking for work (the so-called “discouraged workers” who are no longer counted in the official unemployment rate statistics). Recent statistics show that of the monthly increase in employment, over half is part-time or temporary jobs, instead of the good-paying full-time jobs with benefits that were lost during The Great Recession. Until most Americans have good-paying, full-time jobs, they will not be paying income taxes at the level prior to The Great Recession.

Conclusion:

The federal government has shown no shame about bailing out special interest groups. Also, when the 80 million Baby Boomers born from 1946-64 retire (or have already done so), they will be collecting Social Security and Medicare benefits instead of paying income taxes. The federal government will want to ask for higher taxes instead of cutting spending. This is why one should seriously consider a Roth IRA conversion in 2014 and eliminate Uncle Sam from your family income taxes for the rest of your life, your kids’ lives, and even your grandkids’ lives.

Contact Dr. Harold Wong at (480) 706-0177, haroldwong1@yahoo.com, or visit www.drharoldwong.com. or www.DrWongInvestorGuide.com.