You May Miss a Great Opportunity if You Don't Act Now

Last week I wrote about wealth transfer strategies you should consider in 2012. I believe that many families, unless they take action soon they may miss a great opportunity. I do not think that families are understanding the tax legislation wave coming to us in 2013. Maybe the focus right now is the elections.

Just to give you a short summary of tax changes scheduled to kick in with the coming of the new year in 2013 (here I am only covering federal tax legislations, to which you need to add the tax increases of states and cities in your particular area):

- Capital gains tax is scheduled to rise to 23.8% from 15%

- Dividend tax is set to rise to 43.4% from 15%

- Estate and gift tax will rise to 55% from 35%

- Estate and gift tax exemptions are going from $5 million back to $1 million

Regardless of your current tax levels, it is important that you review your current tax situation and meet with your tax advisor to determine how the new tax legislations will impact you. Today I will share with you a much simpler strategy you can implement this month. IRA conversions to Roth IRA. This continues to be an overlooked strategy and I will share with you two good reasons why you should take a closer look at Traditional IRA conversions.

1. In the past, Roth IRAs were capped at $100,000, but that ceiling was lifted in January 2010.
2. You can make contributions past age 70 ½ .

If you are in a situation where you don’t expect your tax rates to go down at retirement, 2012 may be the perfect time to leave your traditional IRA, pay the taxes, and convert the assets into a Roth IRA. Here is why:

1. Assets are currently depressed in value.
2. Lower current tax rates compared to the expected increases in tax rates as shown above, now is a good time to take the conversion tax hit now.

Once you complete the conversion your assets will not only grow tax free but then allow for tax free withdrawals at a period of time when you will probably be paying a much higher tax rate. By doing this you are in essence converting your traditional IRA into a dynastic vehicle by paying the taxes now in a low-tax environment, thus passing the Roth IRA on to your heirs, where the assets can grow indefinitely at a tax-free rate during the heirs’ expected lifetime and be drawn down, as needed, without the heirs paying any taxes.

However, before you go and make any rash decisions you need to take into consideration at least your liquidity and your needs during retirement. The best thing to do is to visit with your tax advisor to crunch the numbers to see if it makes sense in your particular circumstances.