Future tax rates are where?

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The way it is right now, your regular IRA and 401K monies are all growing in tax deferred accounts.

But when its time to take the money out you will be taxed at your future tax bracket on every cent of that distribution; distributions from a traditional IRA are treated as ordinary income.

That’s a bitter sweet pill to swallow after making IRA contributions and doing the right thing for so many years.

If you’ve been fortunate enough to grow these accounts into over-sized monsters the last thing you want to do is pay a big chunk back in taxes. The top marginal tax rate in this country (for married couples filing jointly) in 1980 was 70%, in the 1950’s and early 1960’s the top rate was in excess of 80%. Who knows where US tax rates will be in the year 2030? Well, public opinion seems to be moving in one direction.

Rising taxes?

Many tax experts believe that marginal tax rates are most likely going to rise. Here’s a quote from an article written (4th quarter 2006) by two economists from the Kansas City Federal Reserve,” In fact, the decline in income taxes for middle income households over the past 25 years is likely to be completely reversed…”

I read most of that article but I’ll spare you the read, it’s not an easy one to get through. Here’s a link to a page of that article which summarizes their opinion.

At the end of the day, if you take advantage of the generous incentives to convert your traditional IRA’s to a Roth IRA now( or in 2010), you won’t even have to think about these kind of tax issues, completely removing it from your scenario.

With the liklihood of tax rate increases, the implied value of a Roth IRA will only continue to rise…

Tags: 2010 Roth IRA Conversion Event, Future Tax Rates, Roth IRA Conversion, Traditional IRA