Paul Ferraresi

I have written many times in this blog about the special Roth conversions available in 2010. My summary of all the long-winded blogs was that a conversion will probably cost you more in taxes than you think, and you will still have strings attached with the Roth. There are far better alternatives for you.

An article in Baron’s magazine may have found other reasons why people are not converting. A Fidelity study found only 7% of investors will convert to a Roth IRA. Also, even with all the media hype, education, and bank/brokerage flyers, more than 88% are unaware of the opportunity. Another reason why people are holding back, the survey found, was government mistrust. A TD Ameritrade survey found that 36% of those who are most ideal for conversion suspect that Washington will change the rules later. Thus, rule changes will mean that the money coming out of Roth will be taxed to reduce the national debt. (This is exactly what happened to Social Security benefits…that is, up to 85% of your benefits can be taxable. Hmmm…taxed once when you earned the money and then taxed again when you receive it. Are you screaming yet?)

There are far better alternatives than IRAs, 401(k)s, and Roth IRAs. Contact us at 713-871-5919 and we will be glad to present them to you. If what you always thought to be true…turned out not to be true…when would you want to learn about it?

Popular wisdom tells you the best way to build a nest egg is to maximize your company’s 401(k) plan. Popular wisdom also held that the sun rotated around the earth, the Titanic could not sink, and the Berlin Wall would never crumble. That’s my way of saying that I think you can construct a stronger nest egg if you funnel money into a personal non qualified retirement plan versus a 401(k) program.

Many people feel that by placing the maximum amount into their 401(k) plan and IRAs they will have great benefits, but these qualified plans are also time bombs.

Assume a couple is making contributions of $4,000/year into their IRA or 401(k) for 30 years. Their total 30 year contributions would amount to $120,000. That is, their…

1) Annual IRA/401(k) Contribution = $4,000 x 30 yrs = $120K Total contributions

Assume they are 34% combined marginal tax bracket for state and federal taxes.

2) Tax Bracket (Income > $67,000) = 34% (Fed + State)

Then, their tax savings would be $1,360 per year, or, $40,800 over the 30 years.

3) Tax Savings = $1,360/yr x 30 years = $40,800 Total

Now, assume they invested the $4,000 per year and obtained a hypothetical 10% annual rate of return for 30 years. They would amass a nest egg of $727,773.

4) $4,000 @ 10% for 30 yrs = $727,773

Let’s assume in retirement they could still earn 10% annual return. Then, without touching the principal they could withdraw $72,700 of annual income per year.

$727,773 X 10% = $72,700 per year withdrawal

Since they are retired, the kids have moved on so they have lost those exemptions; they mistakenly paid their home off so they lost those deductions; They will also be receiving Social Security benefits, maybe they have a pension or are working part-time, which will now place them in as high or higher tax bracket as they were in prior to retirement. Let us assume they are in the original combined state and federal rate of 34%. Their tax bill on the $72,700 withdrawal from their IRA/401(k) would be:

$72,700 income from IRA/401(k) X 34% tax bracket = $24,700 Tax bill

So, in the first two (2) years of retirement they will pay $49,400 in taxes. This $49,400 is far in excess of the $40,800 they saved in taxes during the accumulation years (see Section 3 above). Additionally, they will pay the $49,400 in taxes every two years for the rest of their life. Also, they will have to pay income tax on the $727,773 nest egg when it is withdrawn, plus possible estate tax of 45%. Hmmm! Whose retirement were they planning? Theirs or Uncle Sam’s?

In the first 20 months of retirement, every dollar of taxes saved during 30 years of deductions will be paid back. In fact, a person living a normal life expectancy will pay back over 10 times in taxes, on a qualified retirement plan, during the retirement years than the taxes saved during the contribution years.

For an average couple, they will pay over $500,000 in taxes from their IRA/401(k) from age 65 to 85½ for the privilege of saving $40,800 in taxes while they were working.

Why didn’t someone tell me the rest of the story?

The new administration’s “Payroll Czar” has just been appointed. The original job description is to oversee and regulate the incomes of employees in companies that got government bailout money. Watch out friends—-if you think that it will stop there—-you are sadly mistaken.
This administration wants to control everyone’s income. Look at the hypocracy. You are not supposed to have company functions in Las Vegas or other cities for that is wasted money. But, it is okay for the President to waste millions of your tax dollars for a Friday Night “date night” in New York.
Most Americans never connect the dots. As Pravda stated, the Russian state newspaper, the Democrats have reached their goal. They have maintained an ineffective education system in the U.S. for over 30 years. They have “dumbed down” America. Americans are more interested and more knowledgeable about “American Idol” than what is going on in the world.
During the campaign Obama stated that only the rich will have an increase in taxes. If anyone with a 3rd grade education had done the math, they would have seen that it was impossible to do that…it was a big lie.
Look at today. The present administration wants to cut the pay that top executives make. Remember, the top 20% of income earners pay 86% of all taxes.
Let’s say a person is earning $2 million per year. Their total tax rate is now in excess of 50%. Using 50% tax, then this person takes home $1 million and the Government gets $1 million. If the Government reduces a person’s pay to $1 million, then, in order to get the same tax money going into Washington, they will have to tax him @ 100%, i.e., confiscate all of that person’s income. So, with 100% of the money going to the Feds, then, no other money will be spent in the economy…more recession. By the way, I have not included all the new spending that is planned In this “ tax the rich scheme”.
Now, tell me, would you go to work knowing all your pay will be confiscated? That is socialism at its best.
Well, they could tax people at 120% of their pay! What?
Watch out below!

The media, Hollywood and other sources have been pushing the concept of global warming. Yes, we all have opinions about it, yet, it bothers me that both sides of the discussion are not presented with the same intensity.

What to look for…. the first step has been to “sell” the idea of a carbon footprint. Initially, business will be transacting carbon credits between themselves. Those who fall short will be “Taxed”. Next will be your autos in the bull’s eye based on its footprint. The auto’s carbon footprint will have an additional tax you will pay. Finally, your house energy consumption will be taxed. Before you give up your choice and control look at the other side of the discussion. Watch the political candidates you support. Remember, any government program that starts….never ends.

Here are a few sites for you to check out in your due diligence.

www.americanthinker.com/blog/2007/11/weather_channel_founder_global.html“

http://icecap.us/index.php/go/joes-blog/comments_about_global_warming/

A series of sunset provisions are set to become effective in two years will bring higher capital gains, dividends and estate taxes to you. These are the results of laws passed in 2001 and 2003.

The 15% tax rate on most long term capital gains and qualified dividend income is scheduled to remain effective until 12/31/2010. For the two lowest tax brackets the tax rate is Zero (0) for 2008, 2009, and 2010.

Beginning in 2011, capital gains rates return to pre 2003 levels of 20% and 10% respectively. Dividend taxes are set to revert to ordinary income tax rates (ouch) Estate taxes, scheduled to disappear in 2010, will reinstate in 2011 to the tax rates prior to 2001 (double ouch).

Keep in mind a new President, with a congressional majority, could pass a new law in 2009 and make the taxes higher retroactive to 1/1/2009. Caution – make and execute aggressive tax planning NOW! Do not wait until it is too late.

The capital gains tax rate reached 50% in the 1970’s. It dropped to 28% in 1978, President Reagan moved it down to 20%. The 2003 law moved dividend tax rates from ordinary tax rates of 39.5% down to 15%. This has been a boom for senior citizens since many live on dividends from major U.S. corporations.

Expect law makers to reach a compromise on estate tax providing and exemption on the first $3-4 million.

Again, like I have written many times, over the past years, you should develop a strategic rollout plan on your IRA’s/401Ks. As you can see taxes are going up. It would be better to pay taxes NOW @ lower rates than later at higher rates. There are ways to take up to $60,000 per year out of your IRA/401K without taxes.

Get some help…take action now, or, regret it later.