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Politics and the Fiscal Cliff

It is more difficult to plan for retirement and income taxes when so much uncertainty swirls around what the tax laws and rates will be. Although the January 1, 2013, deadline fast approaches, decisions to change the scheduled rate hikes are uncertain. Further complicating the situation are:

-The federal debt:  The $16.394 trillion federal debt limit is about to be reached. The issue is sure to affect all fiscal considerations through year-end, including the resolution of the fiscal cliff discussion. President Obama as suggested that part of the resolution of the fiscal cliff discussions should include eliminating the need to continue to Congressional legislation to increase the debt limit.

-Sequestration: There are likely $1.2 trillion in cuts to across-the-board discretionary spending set to go into effect beginning January 3, 2013.

-Government funding: Observers estimate that the fiscal cliff in January- in which tax increases will combine with spending reductions- could produce a serious fiscal drag on the economy and trigger an economic slowdown.  Concern about this prospect is prompting a growing feeling that some extension of expiring tax provisions must be enacted before year-end. However, President Obama has indicated that he will not endorse any fiscal cliff compromise that doesn’t include an increase in tax rates paid by the wealthy.

The uncertainty about what will happen with taxes should not keep you from preparing for a new tax environment. It is critical to review your situation carefully with your professional advisors today to determine what opportunities to take advantage of when the ultimate tax landscape becomes clearer.

 

Converting to Roth IRAs

Now may be a good time to convert a traditional IRA to a Roth IRA- as increased tax rates in 2013 would mean that the income tax costs from Roth conversion would be higher next year than in 2012.

There are many advantages of a Roth IRA. In particular, a conversion may be useful because, while you have to pay the income tax on the current fair market value of the assets, neither you nor any heirs who may inherit the account will pay taxes on the distributions received from a Roth IRA.  In addition, assets grow tax free during the account’s lifetime, and you are not required to take minimum distributions during your lifetime, so you heirs may eventually receive a larger tax-advantaged account.

Converting your traditional IRA to a Roth IRA may not always be the best choice. We therefore recommend you and your professional advisors carefully examine how a conversion would affect your circumstances.