Friday, August 21, 2009

How To Avoid The Coming Tax Bomb

One of the major consequences of the record federal deficit is that it will likely lead to a massive tax bomb in the future. And since the top 25% of American earners pay 87% of the taxes, you may want to pay close attention to the following article. Dr. Steve Sjuggerud from Daily Wealth explains how you can save thousands upon thousands by understanding a simple tax-saving tip.

A massive tax bomb will land on us soon...

You are foolish not to protect yourself from it. Today, I'll show you how to beat it.

Look, you know all about it... Our government has spent too much money. According to public awareness firm the Peterson Foundation, the government's debt was $184,000 per person in 2008. For my little family of four, that's $736,000 of government debt. And it keeps growing.

Take a look at the breakdown in 2008:



The government has to raise this money by taxing us, as citizens. But it doesn't tax all citizens, of course... Do you believe 43% of those filing returns pay no taxes at all? It's true.

So who does pay taxes? The top 25% of taxpayers (those with an income of $66,000 or higher in 2007) paid 87% of the taxes. Basically, the top 25% of taxpayers will be the ones paying this enormous debt.

In short, my "burden" is not just the $736,000 for my family... The government will use my taxes to cover its debts on three other families, too. So the government needs A FEW MILLION DOLLARS in taxes from me to pay its debts. Don't think it's just me... If you make $66,000 or more, you're in the same boat!

And that's just the old debt... New debts are ringing up every day. Literally. The national debt grows by a few billion dollars every day. I don't know about you... but I find it sickening.

So what can you do?

One big simple thing we can do to beat the tax bomb is convert our IRA to a Roth IRA...

The biggest difference between a Roth IRA and other IRAs is this: You put after-tax money into Roth IRAs... And because you've already paid taxes on that money, your future withdrawals, including gains, are tax-free.

Well recently, the rules have changed. Between the new rules and the coming tax bomb, you have to consider converting to a Roth IRA.

The government needs big tax dollars right now. So it's changed the rules on Roth conversions, in favor of big investors. Soon, regardless of your income, you will be allowed to convert your IRA to a Roth IRA. This is a foolish move for the government, but it raises money in the short term because you have to pay taxes upfront, so it's doing it.

The list of Roth IRA benefits is huge...

With a Roth IRA, your withdrawals are TAX-FREE. There are many positives to this:

1) If the government raises taxes (which it will), it doesn't hurt you.
2) You can pass it along to your kids or grandkids tax-free, where the assets will continue to grow tax-free.
3) You don't have to make any mandatory withdrawals like with a traditional IRA.

Heck, to me, the biggest risk – and I hesitate to even think about this – is that the government will change the rules again in the future. It shouldn't be able to... But hey, it's the government.

The rule change kicks in for 2010. The timing could be perfect...

You see, in order to convert your traditional IRA to a Roth, you do have to pay income taxes on the amount of the IRA for the year you convert. (That's what allows you to have it non-taxable forever.) You can convert under 2010 taxes, hopefully before tax rates go up. And at the same time, your tax bill for this could be smaller this year, as the stock market is still off of its highs.

Lastly, the government is giving you a special deal here (it needs your money!). If you want to convert, it'll let you stretch out the tax bill to convert over three years. So if you had a $100,000 IRA to convert, and your taxes due on that were $30,000, then you could stretch that $30,000 payment out for a few years.

I hope I didn't make it sound too complicated. Because it's not. In short:

Convert your traditional IRA to a Roth IRA. Pay the income tax at the current lower tax rates on that money. And then you (and even your heirs) will never have to pay taxes on that money again. Inflation won't hurt you, nor will higher taxes, and you get to keep all your profits, tax-free. Good stuff!

This post has been republished from Daily Wealth.
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