Every year, the trustees for Social Security and Medicare issue financial reports. The 2008 versions were hardly encouraging. Medicare already spends more than its incoming revenues and Social Security will reach that point in about nine years.
With the federal government now running a huge budget deficit, more revenues may be needed in the years ahead. "Revenues,"in this context, translates to "taxes,"so future income tax rates might be much steeper than today’s rates, which peak at 35 percent.
Ironically, the taxpayers most vulnerable are those who have acted prudently and saved the most in tax-deferred retirement plans such as IRAs. Here, the key word is "deferred”: money that went into these plans as tax-deductible contributions will be taxable income whenever distributions are taken out. Therefore, you could face punishing tax rates on retirement withdrawals while any money still in the plan at your death may be highly taxed when your beneficiaries tap the account.
To avoid future tax shock, convert your existing IRA to a Roth IRA. With a Roth IRA, all withdrawals may be tax-free, after you have had the account for at least five years and after age 59 1/2. You’ll owe tax on the conversion but not in the future, no matter how high tax rates go. If your income is over $100,000 per year, on a single or joint return, you’ll have to wait until 2010 to convert.