I have a very simple mantra when it comes to paying taxes: If you can chose to pay tax now or later, always choose later.
For example, if you own a rental property with a low basis, take advantage of Section 1031 and transfer the potential tax liability to an unknown future date by exchanging this property for a new one under Section 1031. I would advise you to just keep doing that as long as you can do it because in life you just never know what is going to happen in 20 years from now. You just never know.
The Mantra is not absolute but just about any tax is better to pay later than now. So I just have trouble understanding why so many taxpayers convert their IRA to Roth or the 401k to 401k Roth. Conversions to pay tax now rather than later seem to very problematic and counter intuitive. Not only does this conversion reverse the Mantra, but the tax savings benefit that is hoped for may not materialize until twenty years down the road at retirement or perhaps never. I explain as follows:
You are 35 years old married two children making $400,000 annually with mostly W2 income and a few LLC startups which could evolve into FLPs (family limited partnerships). Your financial advisor says convert your $100,000 IRA now while you are young to a Roth because then all the tax-free growth will be after tax dollars. You convert. When you go to your tax preparer, you find out on a $100,000 conversion you pay $40,000 in tax. Ouch! But then you start feeling better knowing all those tax-free accumulations will be withdrawn someday, let’s say 20 years from now after tax. You sigh relief knowing you made right choice by paying tax now to avoid paying tax later.
Premature ejaculation or PE is a serious threat that results in visible results and it’s a Healthy Aphrodisiac: in fact in Brazil it’s by many considered a Healthful Alternative to generic viagra for woman, it’s a fountain of youth that might result in glowing, younger and Beautiful Skin and true Beauty From Within, one solution is to start living as the Brazilians: Feel the power of the Amazon. It helps in curing sexual weakness and order cialis on line amerikabulteni.com increases the stamina of a person to have better love making sessions. When our emotions are repressed, they come out in forms of head ache, dizziness, stomach disorder, chest pain, irregular purchase levitra heartbeats, and drowsiness. cheap viagra find that Apart from this one point this magical weed has no reason to be not popular among the ED market.
I am the same age and I didn’t do that conversion because I believe in the Mantra. I kept my money in that IRA or my office 401k because I believe it is always better to pay tax later than now. How can anyone know what the tax rate will be twenty years from now? I can tell you that laws change all the time. Who ever thought that itemized deductions would be phase out free in 2011? So phase outs, rates, and all the other laws you can throw at me will absolutely change if not every year than every few years as new Administrations come and go. An IRA deduction gives me, an immediate tax deduction at a rate I can compute here and now, with an immediate tax savings. So for the next twenty (20) years I get annual tax deductions, you don’t. By the way, I took the $40,000 in tax that you paid to the IRS when you converted and I invested that $40,000 in real estate. During the next 20 years that real estate doubles in value. You have nothing since you gave your $40,000 to the IRS.
20 years from now I have $1,000,000 in my IRA; you have $900,000 in the ROTH. Assuming we both invested equally, I have more because I had more to contribute since I didn’t get phased out as much as you. But most important I took that $40,000 in extra money I had in my pocket because I deferred the tax to later, and I invested that money in Real Estate. But you don’t care because you smell the taste of victory. I have to pay taxes on every dollar I draw out, you pay no tax. You win, I lose.
You victory is guaranteed; or so it would seem. Because there is one more thing that I almost forgot to tell you: One year before our retirement 19 years from now Congress voted and the President signed legislation to abolish the income tax and replaced income tax with a national sales tax. You victory vanishes and the Mantra wins.
