Is There a Conversion in Your Future?

In 2010, previous restrictions on converting traditional IRAs to Roth IRAs will be permanently removed. Anyone who wants to do a Roth conversion may. In addition, the government is going to give a tax deferment on any conversions done in 2010.

For conversions occurring in 2010, 50% or the resulting income will be recognized in 2011 and 50% in 2012. In effect, you will have an interest free loan from the government from the date of conversion to until you have to pay the tax – as late as April 15, 2013.

That said, keep in mind that if income tax rates go up, you could end up paying a lot more tax than planned. I believe it’s likely that the top two tax rates will be higher during these tax years. Alternatively, you may choose to include all the income on your 2010 return to be taxed at the rate in effect for 2010.

In my opinion, a Roth conversion can be a very beneficial strategy for some investors. There are specific circumstances which make it beneficial, and we should discuss and consider if a Roth conversion is a good planning opportunity for you.

A Longer Rebound than Normal?

Looking back at the past nine recessions, there has been a definite correlation between the depth of recession and the strength of subsequent recovery. Considering the pent-up demand created because of the extent to which businesses cut back on production, inventories and payroll during a downturn, the reverse response during the eventual recovery is understandable.

For example, following severe slumps in 1973-75 and 1981-82, real GDP grew 6.2% and 7.7% respectively. Recently the average forecast of 52 economists – surveyed by Blue Chip Economic Indicators – call for growth in real GDP of 2.7% over the next four quarters. During the same nine previous recessions, real GDP has never required more than three quarters to regain its peak level prior to the downturn. Can history not predict the strength of our next recovery?

If not, the lingering credit crisis may be a major factor as households may need longer to reduce debt and save more before increasing spending, limiting the business sector’s recovery.

So far, surprisingly positive data in recent weeks supports the historical, upbeat recovery scenario. Only time will tell!

(Source: Business Week, 12 Oct 2009)