A Government Boondoggle that Can Save You Thousands on Your Taxes

"Thank God for Obama," my accountant, Hank Hurst, said to me yesterday... 

"I know people are out of work. But accountants like me have never been so busy, thanks to all the new and potential tax changes and regulatory changes." 

Hank went on about these changes. What interested me the most is a government boondoggle... a program that can save you hundreds of thousands of dollars in your tax money. 

For this to make sense for you, you have to answer "yes" to these three questions:

• First question: Do you expect U.S. federal income tax rates in the future will be higher than today?


The answer should be obvious... At the trajectory we're on, with massive government debts (not to mention future health care and Social Security liabilities), higher tax rates are a certainty. 


• Next question: Do you believe capital gains tax rates and dividend tax rates in the future will be higher than today?


Obviously, this should have the same answer as the first question. 


• Last question: Do you think inflation in the future will be higher than today?


This should be obvious, too... At the rate our government is "printing" money and spending it, future inflation is a foregone conclusion.

If you answered "yes" to these three things, then you should seriously consider getting in on this deal. Here's the story: 

The U.S. government needs your money now. So it's willing to do something foolish to get your money today, instead of waiting until you retire. The government has created a loophole that allows us to exploit its desperation for cash. 

If the government were smart, it would wait, and take $400,000 from you in the future instead of asking for $40,000 today. But it needs money now, and it'll take what it can get. 

So starting on January 1, 2010, ANY American, regardless of income, can convert his IRA to a Roth IRA with no penalties. You have to pay income tax due, but you get a special "grace" period until April 15, 2013 to fully pay it. 

When you do this conversion, all your money grows tax-free... It can grow to millions, and the government can't tax it ever again. 

If you believe those three questions above should be answered "yes," then you're beating the government at its own game. Let me show you... 

Let's say you have a traditional IRA with $100,000 today. That might grow to $1 million in 20 years. At that point, you'd have to pay nearly $400,000 in taxes to get the money out (using a 39.6% income tax rate). But the joke is on you... because a good portion of the "gain" on your investment will probably be from inflation. 

If you take this deal and convert your traditional IRA to a Roth IRA, then you have to pay $40,000 in taxes by April 2013. But if you've got the cash elsewhere, you don't have to take it out of your IRA. So in 20 years, $100,000 will turn into $1 million, with no taxes due at the end. The $40,000 today is the cost of not paying $400,000 in taxes in the future. 

Now that's a simple example. Most people contribute yearly, and then withdraw yearly when they retire – they're forced to withdraw money annually by law in a traditional IRA. That way, the government can collect its taxes. But in this Roth, you already paid your taxes. You can take your money out any time... no penalties, no taxes. 

This deal is not right for everyone. If you're close to retirement age already, or if you expect to be in a low tax bracket when you retire, it probably doesn't make sense for you. 

But if you're younger... and you're worried about big government and inflation... it's the best way I know to beat the government at its own game. Instead of getting taxed on inflation, you can use inflation to your advantage. Your money "inflates" tax free in your Roth IRA. 

There are a lot of ins and outs here. And the big risk, I'm afraid to say, is if the government changes the rules. Also, I'm not a tax advisor – far from it! So don't take it from me. Do your homework. Talk to your tax man (or talk to mine... you can reach Hank by e-mail at [email protected]). 

If you believe higher taxes and higher inflation are in your future, then this 2010 Roth deal is worth considering. 

Good investing, 

Steve