According to Arthur Laffer, noted economist and author of the recently published “Return to Prosperity: How America Can Regain Its Economic Superpower Status,” in Today’s Wall Street Journal opinion column , 2011 will be a horrible year economically.  To quote Laffer, “Today’s corporate profits reflect an income shift into 2010.  These profits will tumble next year, preceded most likely by the stock market.”

Why the gloom about 2011 – tax hikes! Laffer points out that the nine states without an income tax are growing faster and attracting more people than are the nine states with the highest income tax rates.  On or about January 1, 2011, federal, state and local income tax rates are schedule to rise sharply as the 2001 tax cuts expire.

Here’s what’s happening on January 1, 2011:

1. The highest income tax rate will go to 39.6% from its current 35%
2. The highest dividend tax rate will go to 39.6% from 15%
3. The capital gains tax rate will go to 20% from 15%
4. The highest estate tax rate will go from 0% to 55%
5. Payroll taxes will rise
6. The Alternative Minimum Tax (AMT) will increase
7. There will be a tax increase on “Cadillac” health care plans
8. State and local tax rates are going up again, as they did in 2010

Laffer suggests that when rational taxpayers move their income from 2011 to 2010 to minimize the impact of the increased taxes, the US economy in 2011 will go “off the tracks,” leaving the US with a “severe ‘double dip’ recession.”

How can you, on your own individual level, reduce your exposure to these tax increases?  One way, for anyone who has a traditional Individual Retirement Plan (IRA), is to convert the traditional IRA to a Roth IRA in 2010.  As you may recall from my prior post , for 2010 the rules have been loosened to allow anyone and everyone, regardless of income level, to convert their traditional IRA to a Roth IRA.  The only downside to conversion in 2010, is that the person converting must pay the income taxes on the transfer of the traditional IRA to a Roth IRA.  But that may actually be the upside.  By paying your income taxes on the conversion in 2010, you get the 2010 reduced rates, not the 2011 and later years higher rates (does anyone believe taxes are going down in future years?).   The savings can, and in most cases will, be significant.  For 2010 Roth IRA conversions, the income tax obligation can be paid over two years (2010 and 2011).

Another “advantage” of the conversion to the Roth IRA in 2010 is that account values are down from their recent highs, which reduces the total income tax burden.  If Laffer is right, those with stock market biased portfolios will also avoid the pre-2011 “tumble” in the stock market – if they act now rather than later in the year.  For Roth conversions that take place in 2010, the payment of the income taxes can be spread over two years.

Conversion to a Roth IRA now allows you to reduce the investment risk in your portfolio to accommodate what appears to be a really bad economy coming up next year, at least according to Laffer.

Here’s what the guru economist Laffer has to say about Roth IRA conversions:

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts.  After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future.  Given what’s going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax rfeceipts once the surge is past.  If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

From an estate planning and asset protection perspective, converting to a Roth IRA is also a home run.  With the Roth IRA there are no minimum mandatory distribution requirements as there is with the traditional IRA.  There are no mandatory withdrawals from a Roth IRA beginning at age 70 ½ as is required with the traditional IRA.  There is no income tax to be paid on withdrawals from a Roth IRA.  The only tax to be paid on a Roth IRA is the estate tax, and with proper planning, we sometimes can even avoid that tax and provide your heirs with the full value of the IRA, or more.

Opportunities even exist for not only spreading the income tax payments resulting from the Roth IRA conversion over the next two years, but also there are opportunities to reduce or eliminate some of the income taxes liability with proper planning.

Everyone with an IRA should consult with their financial advisor, CPA, or estate planning or tax attorney, to determine how they can best take advantage of this one year opportunity to reduce income taxes for years to come.

Don’t let your IRA investments go “off the tracks.”  We can help you reduce your taxes, show you how to reduce your investment risk, give you peace of mind that you have minimized your tax burden and enhanced your wealth protection, and ensured your retirement income or a legacy for your children and grandchildren.  Call us today for a no-cost, no-obligation consultation to see how a Roth IRA conversion works for you.  Call 904-448-1969, or email us at info@thecolemanlawfirm.net