It may just come down to what you think about the future of taxes. Most people when asked think that the markets will improve or return to a level where their investments may have decent returns over time. But the conversation about taxes turns out to be a more difficult discussion.
The S&P has bounced back 60% since the lows in March 2009. If you look back over thirty years or so, stocks from January 1973 to December 1974 dropped 48%. Over 17 months from October 2007 to March 2009 stocks dropped 54%. In 1975 stocks rose 38%, in 1976 another 25%. The bounce from March 2009 to today is nearly 60%. Roughly it looks like the same scenario in 1975 as we currently are experiencing.
What happened after the rally in 1975/76? It didn’t last. Some would say it was the elections that followed in 1976 that put 61 Democratic seats in the senate and held the majority in the house. Looks vaguely familiar today. Inflation kicked in and pushed up taxes by way of bracket creep. Are we going to tax our way out of our current recession?
Medicare and Social Security are headed for a train wreck. On top of that our national debt is growing daily and TARP is being “re-designed” as we speak. What happened to paying it back to the tax payers? We are going to be making tough generational decisions on how to pay for all the entitlements being discussed. It most likely will be handled by raising taxes.
Part of the attraction to converting to a Roth was that the values had dropped dramatically and your taxable event would be lower. If you stayed the course with your investments they most likely are up from the lows going into 2010. Granted, you have all of 2010 to convert so you may be able to make a more educated guess as to when to convert based on the value of the portfolio. Another attraction to converting was the ability to spread the taxes over a two year period (2011 and 2012). However, taking a guess on tax rates during that same time period is a much tougher question. What if you spread the tax payment out and your rates increase in 2011? Bigger question is what you think your tax rate may be when you plan on using this money or at least by the time you are 70 1/2 which is the mandatory age of minimum distributions in a traditional IRA. A Roth does not force the mandatory distribution.
Tax considerations may play a bigger role in the conversion thought process than what most individual investors are considering. Also, don’t forget about “lost opportunity” cost for those dollars you take out of your portfolio to pay the taxes, or inflation and a rising interest rate environment – topics for another time!
