In the 2010 tax year, for the first time, there is no $100,000 income limitation on the ability to convert IRAs and other tax-deferred retirement accounts into Roth IRAs. Abolition of the limit was set in May 2006, as part of the 2005 Tax Increase Prevention and Reconciliation Act, which extended the expiration of the Bush tax cuts on wages, dividends and capital gains through 2010.
To convert to a Roth entails paying any deferred taxes now, in exchange for freedom from taxes forever after on principal, income and gains, whether for one's self or one's heirs. The tax and estate planning benefits are so compelling that the wealthiest Americans are likely to convert in droves. When the conversions are reported next year in tax-year 2010 filings, that's going to drive hundreds of billions of dollars in unexpected revenue.
Is the IRA market really big enough to do that? Maybe not on its own, but qualified distributions from 401(k), 403(b) and even defined-benefit pension plans could be converted to Roth IRAs under the new rules, according to Mann Associates, a benefits consulting firm in Riverwoods, Ill. My firm, Trend Macrolytics, estimates that there is at least $9 trillion in these tax-deferred vehicles. About 60% of that, or $5.4 trillion, is in the hands of the wealthiest 10% of households, and most of that is eligible to be converted. If just 10% of it is converted, then taxes would be paid on $540 billion at a 35% rate—generating a $189 billion revenue surprise for the U.S. Treasury. ...
Sadly, we expect the powers-that-be will be tempted to simply spend this revenue miracle. What's more, they'll probably demonize "the rich" who made it possible. They'll use tax data to prove that "income inequality" is widening—but it's only because anyone who converts will have to report the converted amount as part of adjusted gross income, even though it's not actual income at all.
Worst of all they'll fail to understand what produced this revenue miracle in the first place. Will they learn that cutting tax rates on the wealthiest Americans can, under the right circumstances, produce more tax revenue when we need it most? Not a chance. Politically, they can never admit the truth: that the hated Bush tax cuts are turning out to be a miraculous gift that keeps on giving.