Our customers’ investments will have less-impressive returns in the future. We can help them achieve better results.

Reducing or eliminating income taxes will maximize the net benefit of their investments.

Income tax planning is beneficial for many reasons. Not as much risk is necessary to achieve income requirements in retirement.

More income is taxed in the lowest brackets because Roth IRAs don’t increase taxable income. Preferentially taxed or tax-free income reduces the chance that Social Security (which is non-taxable at certain income levels) becomes taxable. Finally, if taxable income is kept low, we reduce the possibility that our clients will be subject to Alternative Minimum Tax.

This kind of planning is vital because income taxes will continue to rise. I have discussed this in past columns; the
government will face ever-increasing expenditures. Increased spending will surely lead to increased taxes. They will have to find the money somewhere.

But Americans can take “control” of their income tax rates in January 2010, when income restrictions for conversions to Roth IRAs will be eliminated. The greatest opportunity pertains to conversions made in 2010, because no tax is due in 2010, 50 percent of the tax is due in 2011, and the final 50 percent of the tax is due in 2012. After 2010 all taxes will be due and payable in the year of the conversion. Allowing three years for tax payment makes 2010 a pivotal year for income tax planning.

Space doesn’t allow me to do the math for you. Most clients will benefit from converting. Wealthy people with large pension assets benefit the most. They will inevitably see higher tax rates in the future. At present, taxes are historically low. Smart people should pay those taxes now.

This will be the last time Americans will have a say in the tax rates they pay. Please make sure every American gets the chance to make that choice.

Converting to a Roth is worthwhile if you believe tax rates will be the same or higher in the future. But you cannot arrive in 2010 and advise them to do this. You must begin convincing them immediately. Ask the question, “Do you want to pay taxes when the rates are high or when they are low? This could be your last chance to be in control of that choice.”

Next month, in part 3, I will share another opportunity to provide tax-free income that is not well known to our customers.