With our recent US Debt downgrade, I wonder; how are we truly going to deal with the roughly $32 Trillion and the annual interest payments required?
If I had the “definitive” answer, perhaps I would go into politics!
To reduce our debt, we can either pay it, or default! Seems rather obvious! Default should be out of the question, so how do we pay it?
If the solution is to raise income taxes, having money in Roth accounts may prove to have significant value. The reason, assuming you follow the required rules for Roth accounts, future withdrawals can be completely income tax free. Imagine, withdrawing funds from your Roth IRA and not getting a 1099R to report the withdrawal as income.
Will income tax rates go higher? The current tax rates are set to expire (sunset) at the end of 2025. If congress does nothing, tax rates will revert back to higher rates prior to the Tax cut of 2017.
My primary concern is how the quickly increasing interest payments will impact the Federal Budget. In only a hand-full of years, the annual interest payment will surpass $1 Trillion. That’s a ton of money to pay without receiving anything in return.
Having funds in Roth accounts, can afford you more potential tax flexibility if in fact, rates do rise in the future.
The potential benefits of Roth conversions are as follows:
- Income can be completely income tax-free
- Your Required Minimum Distributions (RMDs) should be lower going forward, because you’ve withdrawn a portion of your IRA previously.
- The distribution will not negatively impact your tax rate for capital gains and taxes on dividends.
- Roth distributions will not impact whether or not your pay the additional Net Investment Income Tax (NIIT).
- The Roth income will not be included when calculating your Medicare Premiums.
- Roth IRA’s can pass to your children without them having to pay ordinary income taxes.
Should you consider Roth conversions? Yes, nothing ventured, nothing gained.
We can model your potential Roth conversions to determine the current year income tax impact and compare it to the potential benefits going forward.
For our clients, we’ll be discussing the potential benefits at upcoming review meetings. For non-clients, please feel free to reach out to us to discuss how Roth conversions may benefit your situation.
Markets/Earnings/Inflation
Last week’s debt down-grade halted the market moving higher. For the week, the Dow was down (1.11%), the S&P 500 lost (2.27%), the Nasdaq Composite (2.85%) and the Russell 2000 Small-cap index down (1.21%).
Foreign stocks did not buck the trend, losing (3.06%) and emerging market stocks down (3.32%).
Bond yields ticked higher as the 10-year US Treasury finished the week with a yield of 4.042%.
84% of the S&P 500 companies have reported with 79% reporting upside surprises, while 65% reported better revenue than expected. This week earnings reports continue with Eli Lily, UPS, Tyson Foods, NRG Energy, Sony, Disney and more.
The major reports this week will be the Consumer Price Index (CPI) on Thursday and the Producer Price Index (PPI) on Friday. Expectations are for the monthly read on inflation to be somewhat tame.
The hope is that after last Friday’s modest job gain of 187,000, continuous mild inflation readings will stop the Fed from raising rates at their September meeting.
If both the monthly jobs numbers and inflation data continue to fall, we need to watch, how far. The appearance of a soft-landing can quickly morph into a hard-landing.
Let’s hope the folks in the “soft-landing” camp are correct.
When will we know? As always, time will tell!!
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If you have any questions or comments, please feel free to send me an email to Paul@retirementrefined.com
