How would you like to create a tax free retirement account from your taxable retirement accounts?
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Given what has happened in this country in the last year, Tax Rates are going to go UP!
Everyone agrees that tax rates in this country are going to change. Most people will also agree that the current rates will probably increase rather than decrease. However, what people really don’t realize is that the current tax rates may be at their lowest point than they are likely to be in the near future.
The general advice from well informed and well meaning accountants and CPA’s is to defer paying taxes when possible, if you are legally able to do so. However, if tax rates are the lowest they will be or are likely to be in the future, that advice should, perhaps, be reconsidered.
After all, when you think about it, the tax system really imposes a penalty on people who are savers. Just think, if you do the “right thing” and save for your retirement in your IRA or 401(k) account, you are getting a deduction for the amounts saved in those accounts. An example will illustrate this point:
Let’s analyze the typical, traditional IRA account.
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How does the typical retirement account work?
Husband & Wife setting aside $6,000 per year into IRA accounts.
Tax savings - 33 1/3% tax bracket = $2,000
Savings plan - 20 years Total Taxes saved = $40,000
Accumulation at 20 years = $1,000,000 (hypothetical)
Withdrawals to equal interest earned so as to not deplete principal @7.5% =
$75,000 withdrawal per year
-25,000 Taxes Due
$50,000 Net available dollars
*NOTE: After only 2 years of withdrawals the government will be paid $50,000 in taxes which eliminates the deduction allowed during accumulation over 20 years. If you grasp this, you have to ask yourself at this point, “Whose retirement am I saving for, mine or the government’s?”
In order to net $75,000 after taxes a withdrawal of $112,000 would be necessary, which would dip into principal and deplete the 1 million dollars. This could even be worse. Because over the next few years, if tax rates increase the way some experts think they will, the 33 1/3%
may look like a bargain.
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Which is why this may be the time to evaluate ways to Move Money To Tax Free Accounts.
Looking back at history, some may remember that from 1944-1963 the highest tax rate was up at 90%. In 1964, it went down to 77% and in 1982 to 50%. A return to these rates may be in our future. Some experts think that to properly service our National Debt, an effective tax rate of 85% would be required.
This is because due to our National Debt, the only way our government can service it is by: selling our bonds to foreign governments (like the Chinese, who have expressed concern over our ability to re-pay); print money ( which would drive inflation ) or ....... raise taxes. So, what do you think is going to happen?
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One way to move money to tax free accounts is through ROTH conversions in 2010.
In 2010, under the current tax laws, anyone can convert a traditional IRA to a ROTH. It will accelerate the tax due. However, if you believe that paying the tax now, instead of 15 or 20 years from now when rates may return to historical highs, it will be like taxes are “on sale” now and contrary to the standard advice of deferring payment of tax, paying the tax now may be the smartest thing people ever did. Furthermore, in order to lessen the sting of paying those taxes, the government will allow you to pay the tax due over 2 years. One-half in 2011 and one-half in 2012. It’s like having an interest free loan to pay the taxes due. If structured properly, you can even recover some of the money lost to taxes.
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How do you do it AND save the taxes?
We have developed strategies that can recover some of the money lost to taxes - in some cases 2/3 might be recovered. We also specialize in developing other strategies using other tax free accounts. The government wants to encourage us to become financially independent, without dependence on Social Security. So, the government provides us with various provisions or incentives within the tax code to help us.
These plans are complicated to structure properly so that they are fully compliant with the Internal Revenue Code, therefore, you should seek the advice of a knowledgeable consultant. Our office is available to consult with you for your own plan.
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