Remember that taxes do good things and you do have choices

First, breathe.  Lighten up.  We’ve all been there in one year or another.  Find gratitude.  The taxes you pay do good things – libraries, schools, roads, people to fix the roads, street lights, police, courts, and the list goes on.  These things may not be perfect, but for the most part, they’re functional.

Second, remember that you have choices.  Here’s something else a bunch of you did this tax season:  You funded your qualified retirement plans.  When you looked at the difference in your tax bill based on whether you funded that plan or not, it felt like a no-brainer to fund it.  You thought, “Look at all the money I saved in taxes!”  You probably thought with pride, “I put money away for retirement just like I’m supposed to and look at how much I put away!”

If you had these thoughts, I want you to contemplate these thoughts:  (1) If you believe taxes are going to remain the same or go down for you in retirement, it makes sense to fund qualified plans.  But if you believe taxes are going up, you’ve just “kicked the can down the road,” when taxes in retirement will likely be much higher.  Did you really save money?  Frankly, taxes are on sale right now.  (2) You may have been better off funding a tax-free retirement with after-tax dollars, rather than a qualified plan, so that when you go to retire, you’ll have fewer taxes to pay, less fear about tax deadlines, and a simplified tax return.  Starts to make retirement look even better, doesn’t it?  Remember that you have choices about how you earn, invest, and spend your money.

Suggestions for managing bills and cash-flow

I’m a big believer in keeping as much cash at your disposal as possible and paying government entities on-time, but not early.  No sense in giving someone free use of my money, especially if I might not owe as much as I’m predicting.  How to do this is always the challenge.

First of all, there’s nothing worse than surprises, so eliminate them.  Be in conversation with your accountant at least three times a year (March, June, and December, if not also September) and talk about your income, how much you’re paying in taxes (whether that’s per paycheck or quarterly payments), what your projections are for the year, and what big expenses you may have this year.  That way, if you can adjust your quarterly payments so that they’re more in line with where you will end up at year’s end, the last check is smaller to write.

Second of all, create an account that is devoted to saving up for those “big checks” that happen annually or semi-annually or actually fund them.   Set aside money for property taxes, go ahead and fund your Health Savings Accounts, and your retirement accounts.  Get that money working for you.

Finally, if you’re behind on payments, create a debt repayment schedule and stick to it.  Throw as much money at those debts as you can so you can get in “real time” on your payments.  Sometimes just having a plan will make you feel more in control and capable.

What will this mean?  Most likely, nothing. Congress has been way too busy with healthcare to deal with this issue, especially since the tax generates relatively little revenue. But this issue is a mess for the estate planning of those high net worth folks who tend to contribute to political campaigns and issues.  While the estate tax goes away, the carry-over basis rules step in.  Congress has tried that before. It doesn’t work.  In the spring, Congress will likely reinstate the estate tax to 2010 levels and make it retroactive to January 1, 2010.  We’ll have to see where Congress goes from there.

What should you do?  Bay Area residents will likely have a net worth of over $1 million when they die, so you need to pay attention to what happens and be in contact with your estate planning attorney.  Those folks with parents on life support with estates greater than $5 million might have some opportunities here, but for most of us, no need to kill off those aging relatives next year and no need to panic about your estate plan.

To Roth or Not To Roth

There’s much to consider in deciding whether to convert an IRA:

• Do you think you’ll be in a higher tax bracket in retirement?
• Can you pay the taxes owed as a result of the conversion out-of-pocket?
• If not, will you suffer a 10% penalty for paying the taxes by withdrawing the money from the Traditional IRA?
• Should you pay those taxes in 2010 or spread them out over tax years 2011 and 2012?
• And more….

Do:  Talk to your accountant and financial advisor.  Find your IRA statements and your 401(k) statements from previous employers.  You’ll want to make this conversion early in 2010 (as close to January 4^th as possible), so that you have lots of time to see that account perform.  If it doesn’t produce positive returns, you might want to “recharacterize” it back to a Traditional IRA.

Don’t:  Forget that there’s a tax liability incurred by making the conversion. Talk to your financial professionals about how you’ll handle that liability.  Keep in mind that 2011 and 2012 might bring higher tax rates, making an election to pay that liability in 2010 preferable.

And remember:  The removal of the income limit for conversions is permanent.  You don’t have to make a decision this year.  But the opportunity to spread the tax liability over two years is temporary.  You should also note that the income limitations on contributing to a Roth remain.

This might be a great opportunity for you.  Or maybe there’s a better way to spend that tax money.