JULY 2009 NEWSLETTER

Taxes, Taxes, Taxes

This month’s letter will be brief so you can get back to enjoying the relaxing days of summer.

Taxes have been in the news quite a bit lately. Unfortunately, there is not much we can do to change what the President and Congress do as they raise taxes to pay for the entitlements being promised now, and those promised in the past. I will repeat the prediction made that taxes go up in bad economic times and down in prosperous times. Also, the unfunded liabilities coming due for the promises made to the Baby Boomers by the government back in the First Great Depression will force taxes to rise.  This much seems obvious.  Either raise taxes to cover the promises, or break the promises and deal with the ensuing revolt.

So what can we do? A simple, if not dramatic, strategy is to pay a lot of tax now while rates are still relatively low. Converting your IRAs to Roth IRAs is a great way to pay taxes at a discount and have tax free income instead of being forced to take minimum withdrawals when taxes are at a high ebb over the next 10-30 years. You may recall that marginal Federal income tax rates in the 1970s were as high as 75% for some taxpayers. This makes 35% look pretty good!

The process of converting is very straightforward. The Government permits you to re-characterize all funds in the existing Regular IRA to a Roth. The requirement for doing so is that you agree to pay all the income tax due over a two year period following the year of conversion. So you convert in 2010 and pay the tax in 2011 and 2012. The benefit is then having tax free withdrawals from your Roth IRA forever, and avoiding skyrocketing income taxes. 2010 is the first year that the income restriction on converting is being lifted. As it stands, if you currently have an adjusted gross income of over $100,000 you are prohibited from converting. We anticipate that in 2010 many people will seize the opportunity to make this switch.

Roth conversion is not a new recommendation. The recommendation is being made more and more often by more and more forward-looking, smart people. Ask yourself, would I rather pay a lower tax on four bushels of corn or a higher tax on four truckloads of corn? It is just that simple.

Let me plant this seed now and let us make our plan for how to do this next year in 2010 when the limitations for Roth IRA conversion eligibility are removed.

The big questions are:

1. How much should you convert?
2. Where do you get the money to pay the tax in two installments in 2011 and 2012?

We will work on this together for the balance of 2009 and throughout 2010. We want you to feel comfortable that the opportunity is right for you. Or, if not, that you are comfortable with the decision to not convert to a Roth IRA.

Regards,

Your Advisors at Dominion Wealth