I’ll bet you are thinking that you are not moving at all. The real answer depends on what you are using as your “measuring stick”. If you were to go stand in front of your house at noon tomorrow and never took a step and then looked at where you were exactly 24 hours later, you would find that you are in the exact same place. But let’s expand our measuring stick to our solar system, instead of just our planet. The earth is approximately 25,000 miles in circumference. Since the world spins one full time around in a 24 hour period, then that means the surface of the earth is moving at approximately 1041 miles per hour. So when you are using a different measuring stick you see that in that 24 hour period you actually moved at least 25,000 miles through space. It’s actually much more than that when you consider that the earth is also on a 364 + day orbit. This isn’t a math class so I won’t go into that calculation.
The point is that, depending on the measuring stick that is being used, there can be many different answers to the exact same question and yet they could all be right, even if they directly contradict each other. So what is important is that whatever statistics that you are looking at, you need to make sure that whomever is providing those statistics is using a “measuring stick” that is compatible with your goals.
WHAT IS YOUR TAX BRACKET?
When any of you call and ask this question of us, we usually assume that you mean your income tax bracket and therefore usually answer either 15% or 25%. If we used a total tax “measuring stick” instead we should be giving you an answer more in the line of 60% to 70%. Nearly 50% of every dollar you spend actually ends up in the government’s hands. Don’t believe me yet? Let’s take a look at the normal phone bill. Right off the bat you can see that about 1/3 of the bill is some kind of tax. Even though it may not say “tax”, if it’s a fee that you are paying and getting nothing for it, then it is a tax. (i.e. 911 or rural access fees). Now add on to that the fact that the only money a corporation has to pay all their taxes with, is the money they get from their clients, you begin to understand that it is always us, the consumer, who pays all the corporate taxes. They are built into the price of the item or service that we are purchasing. So all the taxes the corporations pay, including unemployment insurance (a tax), corporate taxes, all the hidden taxes they pay when they buy supplies from other corporations, all of these come back to us in the price. WE, THE CONSUMER, PAY ALL THE TAXES. Need more proof, consider this. Total income taxes collected for 2006 was 967 billion and the total spent was 2.7 trillion. Where did the rest come from. This is just the federal government, to get the total tax picture you have to add in the state, county, city and school district taxes.
That is why we work so hard to help you all pay as little in income taxes as possible, because we all pay plenty in taxes regardless of how much we pay in income taxes. So to that end please read the last part of this quarters newsletter, there is a really potentially big tax break coming up in 2010 that could be of benefit to a lot of your friends and relatives.
Which Works Better, Pay The Taxes Now or Later?
Many of you over the years have either attended my seminars, read my book, or otherwise heard me say that, tax deferral always pays in the end. You have seen my example of taking $1 and doubling your money 20 times over 20 years and then comparing what that looks like under the two scenarios.
Those two scenarios being: 1.) You just allow the money to grow and pay all the taxes at the end whereas in scenario 2.) You just go ahead and pay the taxes each year out of the profits. As you may recall just letting the money grow and then paying all the taxes at the end puts you ahead by over a half of a million dollars. However a new scenario has appeared and it is only going to exist for one year, as the law is currently written and most likely will not be repeated. For the year 2010 and only for the year 2010 the IRA rules have changed. The government has decided to allow anyone to convert an IRA account into a Roth IRA account and better than that you don’t have to pay the taxes in 2010. You have the choice of paying the taxes in 2010 or you can pay half the taxes in 2011 and the other half in 2012. So now the 3rdscenario is this. What happens if you take a tax deferred account, cash it out and pay the taxes later and then have your money grow tax free and come out tax free over the next 15 to 20 years.
For years it has been a point of discussion of whether it is better to pay the taxes now, then take what’s left (usually about 60% of your account) and have that grow tax free from there on out. Or just go ahead and pay the taxes as you take the money out over the years. This is still going to be a major area of contention and discussion as this new scenario plays out but this new set of rules definitely changes what the correct answer is going to be for each person.
I don’t have the space here to show you an example because this is going to take a very complicated set of worksheets to figure out exactly how to make this law work to it’s greatest extent for each person. However, I do want you to know that there is going to be a whole lot of hype and marketing that is going to surround this drastic law change. There are going to be seminars, workshops and articles written by the dozens by stock brokerage firms and insurance agents and companies. They are all going to tell you that this is the best thing to happen to the American tax paying public in years and maybe forever. They are going to tell you that it is by far a better way to go because now it will grow tax free and you can take it out tax free. Plus you don’t ever have to take your money out and you can pass it on to your heirs tax free. Although this is all true the following two questions beg to be asked. 1. Why would you pay taxes on money now that you could have gotten out tax free later on anyway? 2. Why is the government doing this? You can bet there is something in it for them, so what is that?
The short answers are these. 1. Many times people, with proper tax planning can pull a fair amount of their IRA monies out tax free. So needless to say I always stay on top of these things and will be working with each of you to determine whether or not, you should be transferring your IRA’s to Roth IRA’s and if so, how much should we be converting in your case. Feel free to call anytime to set up your appointment so that we can work through the customized worksheets that I have built, so that I will be able to give each of you the answer that is best for you. The answer to number 2 is that the government knows there are billions of dollars out there that they at best will only get to tax, on the average, about 5% of that balance over the next 20 years.
They want to tax as much of that money now as they can, especially if people go and pay taxes on IRA money that later on could have been pulled out tax free. They figure the politicians of 15 to 20 years from now can find their own ways of collecting more taxes.
To get the most benefit from this rule many people will have to start taking actions here in 2009 so that the right amount of IRA money will be available to convert next year.
Almost everyone you know owns an IRA. Many people are going to be somewhat mesmerized by the marketing that is going to happen because of this law change and unfortunately many will be led down a path that might actually cost them thousands of dollars in unnecessary taxes. So please be a friend and forward this newsletter to those you care about that are not already clients of mine.
I am working on an in depth report complete with worksheets that can be used for those who live outside of Colorado, so feel free to send it to anybody, anywhere.
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