We expect our opinion of converting your Regular IRA to a Roth IRA is not going to be what some of you want to hear if you have already done the conversion. Call us skeptical or even dumb, but frankly we do not trust the US Government on this one. Here's why.
There has been several special tax saving opportunities in the past few years for taxpayers to convert their Regular IRA's to Roth IRA's and we have not bitten on any of them. The supposed purpose was to offer citizens the chance to convert their retirement assets when they retire by having less to tax and more tax free income. The real purpose was to give the IRS more tax revenue right now. If you do not believe the last two sentences quit reading now and send me an e-mail so I can send you info about some swamp land down east that might be of interest.
Anyway the point is that the US Government is in a real bind debt wise and deficit wise and any revenue they can figure out how to come up with is a positive in their view. Hence our concern about how IRA's of any kind going forward are going to be taxed. We would not put it past the politicians to decide to tax not only Regular IRA's, but also Roth IRA's sometime down the road and maybe right soon. Yes, even those that have been converted will get a special tax of some sort so why convert with that threat out there.
There also is the lingering threat that the US Government might do something even more radical. That something will be to simply confiscate the entire assets of the nation's IRA's, 401k's, and state pension funds. Private pension funds because many involve assets in other countries than the US remain untouchable at the moment. President Clinton considered this when he was in office and wiser heads prevailed before it was pushed out as an trial balloon. Since Obama was elected he actually had Congress do some hearings on this idea after one of his agencies floated the idea of taking all retirement assets from citizens and states and converting them to annuities for all. If you do not believe this might come up again as the Federals get deeper and deeper into debt you are foolish. The trillions of dollars in retirement assets look enticing for politicians looking to lessen the cost of debt at the federal level and giving them the opportunity to spend freely again. If Obama gets re-elected and declares a mandate this could become even more conceivable as a way to take from the rich and give to the poor. We have seen other quasi-legal executive orders just in the last three years such as the one where all prevailing law was ignored regarding GM bond holders so do not put it past Obama to do an executive order on this one as well.
Even if neither of the above scenarios occurs there is the final consideration that make us avoid converting to a Roth IRA. Basically anyone younger than around 35 years old should not have any money in a Roth IRA since the first year anyone could contribute was 1998. The only people below that age that might have money in a regular IRA are those who make lots of money and some years were unable to make Roth contributions. Assuming a higher income level Roth's are not an issue for them at the start. With that said only since 2002 has anyone been able to put more than $2000 in any IRA. So the only people who have serious accumulations of assets would like be people over 50 years old and likely above 55 years old. (For this discussion I am leaving out anyone who might have changed jobs and moved money from a 401-k to a personal Roth IRA which is not a wise choice most times) Someone over 55 years old would need to have enough money in a Regular IRA from other sources such as 401-k transfers to make doing a conversion worthwhile. However once you reach that age the opportunity for increases in your IRA assets AFTER a conversion are limited either by the need to begin withdrawals or by the age 70 requirements for withdrawal. My best guess is a minimum of 4 years to break even at 7% assuming a minimum of 22% tax rate on the conversion. Time and compound interest are the best friends of deferred income retirement plans and less than one decade is not much time for assets to build significantly.
Simply put even if tax rates increase they will not increase that much for people below $100k annual income for conversions to matter much tax wise. Add in that the annual adjustment in tax brackets will continue to keep any IRA assets from getting hurt by higher tax rates from that approach. There will also be opportunities for gifts made from IRA's that will offer the chance to lower your tax burden enough on withdrawals to offset any taxes as well. Finally note those that are retired and drawing Social Security, which is in many cases not federally taxed at all, will find their IRA withdrawals possibly LOWER taxed than having that income on top of regular W-2 income.
In the end we believe the mantra about converting is a scheme by the federal government to create tax income now. The press, being mostly economically ignorant, just spews the same advice out in their stories without checking the considerations behind the suggestion.
We began making contributions in IRA's from the very first year they were available and expect our IRA assets are as high as most anyone with the retirement plan. Until there is a better special tax plan we will continue to hold onto our regular IRA assets and not convert.
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