Credit unions are overseen by the National Credit Union Administration, a U.S. government agency.  They have their own insurance fund similar to FDIC that all the credit unions pay into.  They also have their own form of the Federal Reserve system, which is a smaller group of larger corporate credit unions who serve the smaller individual credit unions.  When the smaller credit unions have excess funds, they can deposit the money with the larger corporate credit unions.  Then the corporate credit unions can loan out the money to other credit unions who have higher loan demands, etc.

A few of the larger corporate credit unions got caught up in buying mortgage backed securities issued by Wall Street in an attempt to earn higher returns.  This of course resulted in some huge losses, which are now being passed on to all the smaller credit unions.  In the credit union world, they all share in the losses of each other.  So now, huge assessments are being made to all the smaller credit unions, which are eating up their profits, and putting some on the verge of collapse.  Because of this, the number of credit unions is expected to fall sharply.  It could take decades to pay off the huge losses that have occurred.

The nations credit unions total deposits are about $729 billion.  The losses from these mortgage backed securities are estimated to be between $8.3 billion and $10.5 billion.  So far, they’ve only been assessed with about $1.3 billion in losses.  The rest will be spread out over the next decade.

The questions now that remain are:  How many credit unions will be brought down by these loss assessments?  And will credit unions be able to continue to pay higher rates and have lower fees than commercial banks?

You can look up the financial strength of any credit union in the country by going to:  http://banktracker.msnbc.msn.com/credit-unions/

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.