Mike Brandone

We’re from the Federal Government and we are here to help…

If you are like any rational person you shiver at the thought of a US government office uttering these words. Given our government’s track record, history shows us the benevolent nature of our government leads to greater taxes, more bureaucracy, less efficiency and an increased dependency unlike anything seen in America today. With this installment we are going to focus on government debt and federal taxation.

No one can disagree with the fact that our current deficit is out of control. Just this year alone we have increased our national debt to a number that is greater than all the previous administrations combined. We did it to ourselves; it’s not Republicans vs. Democrats, it’s the mentality of a hand out vs. a hand up.

By now I’m sure you are wondering how this relates to taxation. It’s important to understand where we are tax-wise today, to see how our lives will be affected in the future and what we can do to protect our assets as change occurs.

Let’s focus on our federal tax code. Today, thanks to the 2001 Bush tax legislation, we have the lowest tax brackets since 1930. Sadly, since 2001 our government has chosen not to make these rates permanent. Without legislation to make these cuts permanent (not going to happen with a Democratic President and Congress) Jan. 1, 2011, our tax rates revert back to 2001 levels. Let me show you what this means for you. Currently, we have these following tax brackets. They are: 10%, 15% 25% 28% 33% and 35%. In January of 2011 the rates will increase to: 15% 27.5% 30.5%, 35.5% and 39.1%. Let’s look at how these new rates would affect the new Roth IRA conversion rules.

Effective next year, those of us with Adjusted Gross Incomes over $100,000 are eligible to convert our traditional IRA’s to Roth. Prior to 2010 only individuals with Adjusted Gross Incomes under $100,000 were eligible to convert. Additionally, if you are now eligible to convert, the Federal Government is allowing you to spread the tax over two years, 2010 and 2011.

Remember the title of this article, “we’re from the federal government and we are here to help.” Never let it be said that our government will offer a program that might actually benefit actual tax payers. As an example: if you have $100,000 in a traditional IRA and you have income in excess of $100,000 you can now take advantage of the conversion. You convert the plan and you pay tax in 2010 of half of the account. Let’s say you are in the 28% bracket. This would mean you have a tax bill of $14,000. Your tax bill in 2011 will be $15,250. Remember the 2001 tax legislation sunsets in 2010. That’s a tax bill of $29,250 or an effective rate of 29.25% on your money.

The good news? All the distributions out of the Roth will be tax free when you take them five years from now. That’s right. You have to hold a Roth for five years before you can take the funds tax free. Why? Because the federal government knows if you can’t hold the funds they get there tax bill anyway. Remember this is a long term savings vehicle, not a short term savings account. So it’s not as simple as it looks. Older Americans may think this is a great deal until they realize they can’t get at their funds for five years and they paid a mountain of tax for that privilege. This is how your government gets additional tax money from you without changing a thing.

Your best bet is to speak with a financial adviser to understand the real cost of conversion on this program and other programs that affect your wealth and net worth.

We’re here to help you understand the financial and governmental rules and regulations maze. If you’d like us to analyze your portfolio, if you’d like to simply sit down and chat, we’d be delighted. Call us. 858-259-0131, ext 313 - With Best Wishes . . . Mike Brandone.

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Mr. Brandone is the President of Horizon Financial Services, a retirement, financial planning and wealth management firm in Del Mar CA. For questions he can be reached at 858-259-0131, ext 313 or via e-mail at mbrnadone@torreypinessecurities.com