Mega-Roths and Young-Guy GRATs

Once you create a self-directed Roth IRA (probably by converting your old regular IRA) your goal should be to invest for as much growth as possible. In Forbes Deborah Jacobs tells how Silicon Valley entrepreneurs, using shares of their own companies, are parlaying this strategy into mammoth tax-free capital gains. She also notes an interesting trend for young tycoons to set up GRATs even before they've started a family.

Should the use of Roth IRAs to shelter unlimited wealth be curtailed, as Jacobs proposes?

Roth IRA Conversions: Another View

IRAs, principally rollover IRAs, contain far more retirement wealth than either defined-benefit or defined-contribution plans. More than 95 percent of that IRA wealth is in traditional IRAs. The chart above is snipped from "Should You Convert a Traditional IRA into a Roth IRA." issued this month by the Center for Retirement Research at Boston College.

Are Roth IRA Conversions Overhyped?

Ric Edelman, whose radio show I happened upon yesterday, thinks so. His informative special report on Roth conversions, available online (registration required) includes a rant on the overhyping of conversions by financial advisers.

Conversion detail I hadn't thought about: According to Ric, this year's conversions will be taxed on the value of the converted IRA at year's end, not the year-end 2009 value. If investment gains increase the IRA by 10 percent this year, the tax cost of the conversion will rise accordingly.

Ric made a good point about tax projections: We can guess income tax rates for high earners will be higher in five years. But today's 50-ish IRA holder must weigh today's tax hit against taxes he or she might pay on distributions 20 and 30 years from now.

Who knows what will happen even ten years from now? Obama will be out. The Tea Party candidate may be in. What if the 2020 Congress abolishes the income tax? (You'll get used to paying VAT instead.)

My suspicion: High net worth individuals will be swayed more by psychology than intricate tax projections. We Americans don't care much for self denial or delayed gratification – look at the level of our credit card debt. Only if we're really, really rich are we likely to choose paying taxes today rather than paying taxes in the far-off future.

How to Raise Revenue Without Raising Taxes

“We are talking about billions of dollars coming into the U.S. Treasury," says the IRS Commissioner. Almost 15,000 Americans with offshore accounts, many but not all of them UBS clients, have 'fessed up and sought amnesty. Last August, UBS agreed to turn over the names of about 4,450 suspected tax evaders. Apparently, thousands more turned themselves in because they feared they might show up on the list.

The expected billions in new tax revenue won't solve Uncle Sam's trillion-dollar deficit problems, but the windfall should help a little.

So will next year's expansion of Roth IRA conversion privileges, if wealth managers pitch in. By convincing your upper-income clients to convert, you flood the U.S. Treasury with tax dollars that otherwise would trickle in over the lifetimes of your clients and their beneficiaries.

•

What's that? You want to know how the Treasury will replace that future flow of revenue? Best not to think about it.