http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=0

The last time that this happened was 1955.

Regards,
TJB

From the numbers that I have seen on various websites I anticiapte that the final inflation number for 2009 will show a near zero inflation rate for 2009 (if not negative). The upward limit on the marginal tax brackets will probably not move upward very much, if at all.

The real threat to the marginal tax brackets is that the law that Pres Bush signed in 2001 expires on 1 Jan 2011 (after its 10-year life) and not only do the marginal tax brackets rollback to their 2001 levels, but all the various tax credits that individuals and small business have enjoyed for the past 10 years will disappear as well. This will mean that the 10% bracket disappears altogether. I think (but have not confirmed) that the others brackets breakdown as follows: The 15% remains the same, the 25% moves to 28%, the 28% becomes 33%, the 33% become 35%, and the current 35% becomes 39.6%. The upper limits on the marginal tax brackets will probably move a little higher as well.

(Here is my guess, or prediction, on what will happen —- Congress will see that the economy has not yet recovered enough to allow the marginal tax brackets to revert back to their 2001 levels. They will also not have put forth any time and effort to work out what a new tax bill should contain or see which tax credits are working and which need to be changed. Therefore, Congress will just change the sunset date on the rollback from 1 Jan 2011 to 1 Jan 2013. This will push the rollback to occur and coincide with when the new President takes office should Obama lose reelection. If Obama wins in 2012, Congress will move the sunset date to some point further down the road so that he and that Congress can address it during Obama’s second term. —- IMHO.)

By the way, I did make my 2010 T-IRA contribution and I did complete a conversion to a ROTH-IRA last week. The final conversion value was about $250,000 with about $30,000 of it in non-deductable contributions. Now the process begins to save for the federal and state taxes that will be due in the 2011 and 2012 tax years. Estimated to be about $45,000 in taxes each year. — OUCH !!!

Regards,
TJB

Regards,
TJB

Opps, that is not correct. What it actually should read is that “Additionally, I plan to file for an extension for the 2010 tax year so instead of paying in April 2011 (for 2010 taxes) I can wait until Oct 2011 to either pay or recharacterize the conversion back to the T-IRA. This is a safety-valve feature of the entire process.”

Regards,
TJB

My situation: I am 50-years old. I have approximately $240K in a T-IRA with about $30K of that being non-deductible contributions (contributed after tax). I am currently in the 28-percent tax bracket. I plan on converting the first week of Jan 2010 and selecting the option to pay the taxes equally in 2011 and 2012. Under current tax rules this additional income to be taxed $105K in 2011 and $105K in 2012 will push me into the 33-percent tax bracket. However, right now come Jan 1 2011 there is a roll-back on the tax brackets back to the pre-2001 levels and the two upper brackets jump to 35 and 39.4 percent.
ASSUMPTION: I am assuming that Congress will not allow the rollback to occur (at elast in 2011) because the economy will not have fully recovered and the rollback not only affects the marginal tax brackets but also many of the taxcredits that small businesses and others have taken advantage of over the previous 10 years. Time will tell on this assumtion over the next 12-months.

Currently, my estimated tax (federal and state) hit will be about $40K more each year (OUCH!!) in 2011 and 2012. This is a substantial bill and has to be planned for. One option is to increas my withholdings a little more from the paycheck. (Either additional funds need to be withheld or estimated quarterly payments are required, or both, because of IRS rules.) I have already set aside 30K of outside funds and have all of 2010, 2011 and into 2012 before the first $40K of additional tax is due. Additionally, I plan to file for an extension for the 2011 tax year so instead of paying in April 2012 (for 2011 taxes) I can wait until Oct 2012 to either pay or recharacterize the conversion back to the T-IRA. This is a safety-valve feature of the entire process.

The real benefit to the conversion is that the bottom line value of the account is all mine and the amount that it grows until retirement is all mine as well. (Unless COngress changes something.)

The one variable that no one can really predict is what tax-bracket will you be in when you retire and begin to draw on the funds. My assumption: Tax brackets will be higher in 15-20 years than they are now for a variety of reasons. By paying the taxes now on the conversion I avoid any additional payments in the future. From all the various calcualtors that I could find, and just using todays tax brackets, and that regardless of ROTH or T-IRA account would grow the same way. It appears that if I am in a hypothetical 23-percent tax-bracket or higher that the ROTH conversion comes out ahead over the T-IRA assuming a 20-year window before I begin to draw down on the funds.

Guideline: If you think that your tax-bracket will be no more than 5-pecent less than the tax-bracket that you are in now, then converting comes out ahead. Congress can make any number of changes to the tax code between now and when we draw down on the ROTHs. My guess is that tax brackets will be higher.

I am supportive of the conversion, but the tax-bite has to really be plannned for and cannot be taken lightly. I would also suggest not using any funds from the IRA conversion to pay the taxes for a number of reasons that is beyond what I would like to get into here. If the window is greater than 15-years it is absolutely worth it, if the window is less than 10-years probably not. The “pivot-point” appears to be right at 12-years. Any time horizon between 10 and 15 years is really an individual, case-by, case basis and depends on other retirement fund sources and the ability to pay the tax on the conversion from outside sources.

Comments?

Regards,
TJB

“There is a backdoor approach to this and that allows you contribute to a non-deductible IRA and then right immediately after wards convert it to a Roth IRA and avoid all taxable consequence. It’s a nice loophole that still allows you to continue to contribute to the Roth and benefit from the tax-free money.”

Currently my wife (30) and I (36) bring home about $290,000 a year and have about $225,000 in a rollover IRA. As our tax bracket is currently high due to income, I was wondering if rolling into a Roth would be beneficial. My gut says no, because as we are already in the highest bracket, we will be paying a large amount of taxes and when we retire, we will should be in a much lower bracket. However, the growth of 225,000 (Post taxes) over 30 years could be substantial and not having to pay any tax 30yrs of gains is quite desirable. Another concern is that tax rates are going to be much much higher in 30 years which would impact us, but that is debateable.

I was wondering what your thoughts are on how I should proceed. Thank you for your advice and your great column