A Government Boondoggle that Can Save You Thousands on Your Taxes
By Dr. Steve Sjuggerud
Friday, June 12, 2009
"Thank God for Obama," my accountant, Hank Hurst, said to me yesterday...
"I know people are out of work. But accountants like me have never been so busy, thanks to all the new and potential tax changes and regulatory changes."
Hank went on about these changes. What interested me the most is a government boondoggle... a program that can save you hundreds of thousands of dollars in your tax money.
For this to make sense for you, you have to answer "yes" to these three questions:
- First question: Do you expect U.S. federal income tax rates in the future will be higher than today?
The answer should be obvious... At the trajectory we're on, with massive government debts (not to mention future health care and Social Security liabilities), higher tax rates are a certainty.
- Next question: Do you believe capital gains tax rates and dividend tax rates in the future will be higher than today?
Obviously, this should have the same answer as the first question.
- Last question: Do you think inflation in the future will be higher than today?
This should be obvious, too... At the rate our government is "printing" money and spending it, future inflation is a foregone conclusion.
If you answered "yes" to these three things, then you should seriously consider getting in on this deal. Here's the story:
The U.S. government needs your money now. So it's willing to do something foolish to get your money today, instead of waiting until you retire. The government has created a loophole that allows us to exploit its desperation for cash.
If the government were smart, it would wait, and take $400,000 from you in the future instead of asking for $40,000 today. But it needs money now, and it'll take what it can get.
So starting on January 1, 2010, ANY American, regardless of income, can convert his IRA to a Roth IRA with no penalties. You have to pay income tax due, but you get a special "grace" period until April 15, 2013 to fully pay it.
When you do this conversion, all your money grows tax-free... It can grow to millions, and the government can't tax it ever again.
If you believe those three questions above should be answered "yes," then you're beating the government at its own game. Let me show you...
Let's say you have a traditional IRA with $100,000 today. That might grow to $1 million in 20 years. At that point, you'd have to pay nearly $400,000 in taxes to get the money out (using a 39.6% income tax rate). But the joke is on you... because a good portion of the "gain" on your investment will probably be from inflation.
If you take this deal and convert your traditional IRA to a Roth IRA, then you have to pay $40,000 in taxes by April 2013. But if you've got the cash elsewhere, you don't have to take it out of your IRA. So in 20 years, $100,000 will turn into $1 million, with no taxes due at the end. The $40,000 today is the cost of not paying $400,000 in taxes in the future.
Now that's a simple example. Most people contribute yearly, and then withdraw yearly when they retire – they're forced to withdraw money annually by law in a traditional IRA. That way, the government can collect its taxes. But in this Roth, you already paid your taxes. You can take your money out any time... no penalties, no taxes.
This deal is not right for everyone. If you're close to retirement age already, or if you expect to be in a low tax bracket when you retire, it probably doesn't make sense for you.
But if you're younger... and you're worried about big government and inflation... it's the best way I know to beat the government at its own game. Instead of getting taxed on inflation, you can use inflation to your advantage. Your money "inflates" tax free in your Roth IRA.
There are a lot of ins and outs here. And the big risk, I'm afraid to say, is if the government changes the rules. Also, I'm not a tax advisor – far from it! So don't take it from me. Do your homework. Talk to your tax man (or talk to mine... you can reach Hank by e-mail at info@hurstcpa.com).
If you believe higher taxes and higher inflation are in your future, then this 2010 Roth deal is worth considering.
Good investing,
Steve |
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THE GOV'T IS LEARNING ABOUT THAT "FREE LUNCH" THING
An update on the government's biggest problem: Interest rates are still rising...
Six months ago, we warned you the government's "bailouts for everyone" policy would spook its creditors... who would demand higher rates of interest to compensate them for the risk of loaning money to a crazed spender. We pointed out the trading vehicle TBT as a way to play a rise in interest rates.
In early May, TBT "broke out" to the upside and confirmed our analysis. The trend became your friend if you owned TBT. Today, we follow up on that breakout. As you can see, the fund just broke out to another new high on the side of rising interest rates. In other words, Uncle Sam's borrowing costs are soaring.
This is a vital uptrend for you to check each week. It is the government's worst nightmare. It is the world saying to the U.S., "Your checkbook is out of balance... and I require higher rates to lend you money." It is the chart equivalent of Robert Heinlein's classic saying, "There ain't no such thing as a free lunch."
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US long-term interest rates continued to push psychologically important levels on Thursday morning as investors worried about the level of national debt and whether the Federal Reserve might have to raise interest rates to combat inflation.
The yield on a 10-year Treasury note, the benchmark rate for US mortgages, rose 1 basis point overnight to 3.956 per cent, having hit 4 per cent during Wednesday after an auction of 10-year government debt failed to raise as much money as some had hoped.
Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent - 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley.
– Financial Times
[The U.S. was] once the world's largest creditor. Now, we are the world's largest debtor. We were once the freest country on Earth. Now, we are barely in the top 10.
We were once a "city on a hill," respected by the whole world for the nobility and restraint of our government. Now, we maintain the world's most powerful armed services and bases in more than 100 different countries, most of which consider us occupiers.
We once adhered to a gold standard, which made our currency the most reliable in the world – literally better than gold itself. We now have a central bank that works day and night to destroy the value of our savings, while propping up notoriously corrupt banks.
– Porter Stansberry,
The S&A Digest
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