President Obama’s understanding of financial planning is fundamentally flawed. In his latest budget, the chief executive proposed a cap on tax-preferred retirement accounts. An individual’s total balance could not accumulate over $3 million. This total would include the sum balances of a traditional IRA, Roth IRA, 401(k) and defined contribution plans.
By MARK JEWELL
BOSTON — When it comes to retirement planning, most of the focus is placed on 401(k)s. The reality is that individual retirement accounts represent the largest share of America’s savings.
At the end of last year, IRAs had $5.4 trillion in assets compared with $5.1 trillion in 401(k)s and other defined contribution plans. Some 40 percent of U.S. households own at least one type of IRA, which offer tax incentives to save for retirement.
Many of these IRA holders are left to their own devices to manage their accounts. Of course, some investors are take-charge types with the ability to maximize savings without taking on too much risk. But in many other instances, portfolio management is hit-or-miss, with little attention to selecting an appropriate mix of mutual funds or other investments.
“Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don’t understand what they are and how they work,” says Dan Keady, director of financial planning for TIAA-CREF, a financial services company. In a recent telephone survey of 1,008 adults, his company found that nearly half of the respondents lacked a basic knowledge.
IRAs provide individuals not covered by workplace retirement plans with an opportunity to save on a tax-advantaged basis on their own. The money put into a traditional IRA can be deducted from the accountholder’s taxable income for that year, and the money isn’t taxed until it’s withdrawn at retirement. Also, workers who are leaving jobs can use IRAs to preserve the tax benefits that employer-sponsored plans offer.
With so many IRA holders managing accounts on their own, approaches vary widely, often to the detriment of long-term savings.
For example, surveys by the fund industry’s trade organization, the Investment Company Institute, found that low-yielding money-market mutual funds make up a far larger proportion of IRA portfolios than is typically considered appropriate. For example, the ICI found that IRA holders in their 60s had invested nearly 25 percent of their portfolios in low-yielding money funds. That’s four times larger than the average allocation to money funds in 401(k) accounts owned by people in their 60s.
Perhaps even more surprising, IRAs held by people in their 20s had an average 22 percent in money funds.
Among the reasons cited for the unusually high weighting: Money funds are often a default investment for small rollovers into IRAs from other investment accounts, and IRA holders may be more likely than other investors to keep invested savings readily available for conversion to cash.
Most investors use money funds as parking places for cash that’s temporarily kept out of higher-yielding investments. But it’s no way to build retirement savings because money funds have offered returns barely above
That said, recent bumpiness in stocks suggests that the end of the long bull market may come sooner rather than later.
While trying to time the market is an impossible task, here are some smart moves you can make with your money right now to protect yourself from the next market downturn while still putting yourself in a position to reach all your financial goals.
1. Get in the Habit of Investing Regularly.
Many people make the mistake of thinking that they don’t have enough money to invest regularly. Instead, they buy stocks only occasionally when they have big windfalls like a tax refund.
But with the automatic investment options that many employer retirement plans and brokerage companies offer, you can put even modest amounts of savings to work for you on a regular basis. That will make you more likely to keep investing even if the market drops, allowing you to take better advantage of bargain opportunities that inevitably arise during downturns.
If you’re like most people, you’ve heard plenty of tales of how a single stock made millionaires out of all of its investors. But for every anecdote like that, there are 100 untold horror stories of investors who lost everything gambling on one company.
The secret to successful investing isn’t finding a single perfect stock, but rather putting together a diverse portfolio of promising investments and building it up over time. Owning many different stocks keeps you from losing your shirt on a single piece of bad news, and boosts your chances for earning solid returns.
When the stock market rises sharply, your overall portfolio mix gets out of balance, overemphasizing stocks and giving you too little in other investments like bonds and cash. Back in 2008, many people were surprised at how big their losses were, simply because they hadn’t realized how much their stock positions had grown during the bull market from 2003 to 2007.
Rebalancing involves selling off some of your winning stock investments to raise cash or invest in bonds or other types of investment assets. By targeting specific percentages for stocks, bonds, and other investments, it’ll be easier for you to keep a well-balanced portfolio.
4. Shore Up Your Emergency Cash Supply.
During bull markets, it’s tempting to put all your cash to work in the market. Moreover, savings accounts are paying next to nothing in interest right now, making having a cash stash seem like a waste.
Yet as an insurance policy, it’s still
April 15 has come and gone, and most people have put another year of tax-return preparation behind them. But a recent Gallup poll shows that an increasing number of people believe they pay too much in taxes, with the fewest Americans since 2001 believing that the amount they pay is fair.
If you’re still in shock from the amount of taxes you just had to pay, you should start working now to reduce your tax bill for April 2014 and beyond. Here are five ways you can get on track to write a smaller check to the IRS next year.
1. Put more money toward your retirement. The best way to shrink your taxable income is to save for retirement using IRAs, 401(k) plan accounts, and other tax-favored retirement savings accounts. This advice tops our list because the amounts you can save are big enough to have a real impact on your taxes. Those younger than age 50 can save $17,500 in a 401(k) plan this year and another $5,500 in an IRA. If you’re 50 or older, those limits are even higher, topping out at $23,000 for 401(k)s and $6,500 for IRAs. Using them in combination can cut thousands off your tax bill.
2. Hold onto winning investments longer. When the stock market is rising, many people sell off their winners quickly to make sure their paper gains don’t turn into losses. But that short-term mentality leaves you paying much higher rates on short-term profits, with some taxpayers losing more than half their gains to federal and state taxes. If you hold onto winning investments for more than a year, you’ll qualify for much lower long-term capital gains rates, which can cut your tax bill on those gains in half — or even eliminate it entirely for some lower-income taxpayers.
3. Take a look at tax-free municipal bonds. With interest rates as low as they are, paying taxes on the paltry amounts of income you can earn from bank CDs and most bonds just adds insult to injury. But especially if you’re in a fairly high tax bracket, you’ll want to take a closer look at tax-free municipal bonds for income. Right now, the muni bond market is in a somewhat unusual position in which yields are actually higher than what you’ll get from Treasury bonds or FDIC-insured bank accounts, even before you take their tax advantage into account. So don’t ignore municipal bonds as a potential source of valuable income as well as tax savings.
4. Boost your withholding. If you didn’t have enough taken out of your paycheck last year, you not only had to write a big check at the end of the year but also might have owed penalties
By Robert Lenzner, Forbes Staff There is one saving grace in President Obama‘s attempt to put a limit on how much money you can set aside in your tax-free 401k retirement account. Thanks to the aid of Janet Novack, Forbes Media Washington Bureau Chief and veteran chief tax guru, we now understand that your 401k can grow beyond the $3 million level from “investment earnings and gains” in the stock market— meaning that astute investment decisions like concentrating on stocks like Berkshire Hathaway or other steady gainers can drive up the value of your retirement cache. This the path to go beyond the Obama proposal which recommends that “If a tax payer reached the maximum permitted accumulation, no further contributions or accruals would be permitted.” In other words neither you nor your employer could make new contributions on your behalf. There is one other meaningful and sensible proposal that would limit the length of time you can pass on your tax-free account to your children and allow them to continue to aggregate assets without paying taxes on them or the income they provide. Under Obama‘s plan, your heirs would have to withdraw the money within 5 years of your death from the tax-free IRA or 401k and pay taxes on it. It could not be extended without limit from generation to generation. Here is our Janet Novack‘s take on the matter. ” I say don’t cap IRAs, but eliminate stretch IRAs. If we want to defer tax on all savings as long as possible, we would need to go to a graduated consumption tax. But that’s not where we are. Instead, this is a tax break specifically for retirement– and that’s my argument against stretch IRAs…. You either cap IRAs, or you make sure Uncle Sam gets his money within the saver’s lifespan. I vote for the latter.”
A glance at some sporting events and teams that have been affected by attacks and threats:
Sept. 5-6, 1972 — Palestinians going by the name of “Black September” kill 11 Israeli athletes at the 1972 Munich Olympics.
April 21, 1987 — A car bomb kills more than 100 people at a bus station in Colombo, Sri Lanka. The blast came during a tour of the country by the New Zealand cricket team. The three-Test tour was cut to one.
Feb. 11, 1996 — Cricket teams from australia and the West Indies refuse to play preliminary World Cup matches in Sri Lanka a week after a huge bomb blast in Colombo killed 80 people and injures 1,200.
July 27, 1996 — Centennial Park bombing at Atlanta Olympics. The attack took place during a nighttime music concert at the Centennial Olympic Park. The explosion killed one person and injured over 100 others.
April 5, 1997 — The Grand National, the most famous horse race in England, was abandoned after two coded bomb threats were reportedly received from the IRA. Sixty-thousand spectators (including Princess Anne), jockeys, race personnel and local residents were evacuated, and the course was secured by police. The race was run two days later.
May 1, 2002 — Hours before the Champions League semifinal between Real Madrid and Barcelona, a car bomb was detonated near Bernabeu Stadium in Madrid. Seventeen people were injured. UEFA made security checks before going ahead with the match.
May 8, 2002 — A suicide bomber killed 14 people outside the hotel where the New Zealand cricket team was staying in Karachi, Pakistan. Fourteen people died in the attack and the New Zealand team returned home.
2006 — Iraqi sportsmen and women were targeted three times. On May 17, 15 athletes and officials of the Iraqi taekwondo team were kidnapped as they headed to Jordan for a training camp. None of the athletes were seen alive again. On May 26, gunmen shot and killed the Iraqi tennis coach and two of his players. The final attack on July 16 involved 50 gunmen who attacked a sports conference in Baghdad. They kidnapped 30 athletes and officials, including the head of Iraq’s Olympic Committee, Ahmed
By Floyd Brown
Earlier this week, I explained how the latest Obama budget would impact the wallets of Social Security recipients. Now, I want to explain how several other new Obama tax hikes will impact you in the near future.
In the just-released budget, there’s a mountain of new taxes the size of Everest. President Obama is a guy who has never met a tax he didn’t like. These new taxes would bring the national tax load to a staggering 20% of our economy.
The following are ten new Obama taxes that, if they pass, will have a huge impact on you and will certainly hurt the already sluggish economy.
1. The “Chained CPI”
Of the new tax increases, the “chained CPI” is the most insidious. Obama’s budget would benefit by manipulating and altering the definition of inflation for all federal budget uses – including federal taxation.
Currently, income tax brackets are indexed to rising prices. By changing the number used to calculate inflation, we face a very real income tax hike.
This is a tax increase for everyone paying income taxes, including middle-class Americans.
It’s my belief that inflation is currently underreported, and experts in the field agree. The “chained CPI” will only make it worse.
Your taxes go up not because of real earnings, but phony earnings that simply keep you on pace with inflation. Congress’ Joint Committee on Taxation estimates that if enacted, a “chained CPI” would cause a $100 billion tax increase alone.
2. Itemized Deduction Cap
Also included in the Obama plan is a cap on itemized deductions. The deductions, such as those for charitable donations and mortgage interest, are usually the sacred cows of Congress.
But not any longer. The cap will directly hurt charities, the housing market, and (of course) taxpayers. Regardless of which tax bracket you belong to, this provision ensures that you can’t benefit any more than if you were in the 28% bracket.
There are three tax brackets above 28% – the 33%, 35%, and 39.6% brackets. Thus, many families will not be able to fully deduct mortgage interest, charitable deductions, or state taxes, among other expenses.
3. Increased Death Tax
The Obama budget would raise the estate tax rate from the current 40% to 45%. And the budget would also reduce the inflation-indexed death tax “standard deduction” from $10.3 million for married couples to $3.5 million with no inflation allowance.
4. The “Buffett Rule”
The Obama budget would inflict the newfangled “Buffett rule” on taxpayers whose adjusted gross income is above $1 million. These taxpayers would suffer an average tax rate of 30%.
5. Increased Tobacco Tax
Tobacco users face a more than 93% increase in the tobacco tax, from $1.01 to $1.95 per pack. On average, a typical smoker in America makes about $40,000 per year, meaning this tax directly targets middle-class Americans.
But this is not the first time Obama has raised tobacco taxes. In 2009, he signed into law a 156% increase in the tobacco tax. The tax hit on smokers will total $78 billion.
6. IRA and 401k Plan Tax Hikes
Tax season is almost over, and there are only a few things left that you can do to affect what you owe for 2012. But looking forward to the 2013 tax year and beyond, adding a Roth IRA to your arsenal of retirement investing tools could save you a ton in taxes in the long run.
The Best Way to Pay Zero Tax
Ever since they first became available to retirement savers in 1998, Roth IRAs have offered a unique opportunity. In a departure from past methods of saving for retirement that involved deferring taxable income until future years, Roth IRAs changed the timing of the tax break they offered. Rather than giving you an upfront tax deduction that can lead to tax savings right now, Roths give you all their benefits on the back end: Assets within an account grow free of tax, and the withdrawals you take at retirement are eligible for tax-free treatment as well.
With tax rates on the increase, the value of being able to shelter income from tax has gone up quite a bit this year. Moreover, with current proposals aimed at raising taxes even further in the years to come, getting money into a Roth IRA now — while that opportunity is still available — could be even more valuable in the future.
Just How Much Is a Roth Worth?
Skeptics might argue that the maximum contributions of $5,000 for the 2012 tax year and $5,500 for 2013 — plus an extra $1,000 if you’re 50 or older — don’t give you enough in tax savings to be worth the effort. But depending on how successful an investor you are, getting the tax-free growth that Roth IRAs provide can be worth a lot more than you’d expect.
As an example, turn back the clock to 1998, the first year Roth IRA contributions were available. Back then, you were allowed to contribute only $2,000 per year to a Roth IRA. Since that time, an investment in an S&P 500-tracking index fund has produced returns of about 5 percent per year, which would have taken your initial $2,000 investment up to almost $4,250. With maximum tax rates on capital gains and dividends of 20 percent, a Roth could have saved you as much as $450 in taxes.
That’s nice, but it’s far from extraordinary. Yet consider this: if you were fortunate enough to choose some of the top-performing stocks in the market for your Roth, the impact would have been much more substantial. The numbers will shock you:
|Stock||Total Return Since 1998||Potential Tax Savings on $2,000 Initial Investment|
|Gilead Sciences (GILD)||3,941%||$15,364|
|Monster Beverage (MNST)||46,395%||$185,180|
Source: S&P Capital IQ. Assumes current maximum long-term capital
With Tax Day just around the corner, it’s go time for taxpayers. If you’re struggling to get those returns finished, here are thirteen last-minute filing tips: Get some free help. Free help is still available for qualifying taxpayers. If you have a simple return and income less than $50,000, contact IRS VITA at 1.800.906.9887 for site locations and hours. File timely. This year, Tax Day falls on April 15. It is not being pushed back because of the sequestration and it does not fall on a holiday this year. Your return is considered timely filed if it’s postmarked or electronically submitted on April 15, 2013. File even if you can’t pay. Don’t make a bad situation worse by racking up extra penalties: the IRS can impose a failure to file penalty for returns that aren’t filed timely. So file even if you can’t pay. You can enter into an agreement to pay what you owe over time (or try one of these strategies). Put some money into your individual retirement account (IRA). You still have time to contribute to your IRA and make it count for the 2012 tax year. You can claim a tax deduction – above the line, so you don’t need to itemize in order to take the deduction – for contributions made to your traditional IRA (but not a Roth IRA). You can make those deductions all the way up to April 15; be sure to tell your financial advisor that the contribution is for 2012 so that it’s coded properly. For 2012, you can contribute up to $5,000 or the amount of your taxable compensation (whichever is smaller) to your traditional and Roth IRAs. And don’t forget about a spousal IRA: if you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. Pay attention to the details. Many schedules and forms have additional questions and checkboxes that are easy to overlook. For example, if you have interest and dividends of more than $1,500 to report on a Schedule B, you have to answer the questions at Part III even if you don’t have any foreign interests. Be sure to read to the bottom of each form and if you’re using tax software, use the long form interview (it only takes a few more minutes). Run the numbers. Sometimes, taxpayers are faced with a choice to take a credit or a deduction (a classic example is the tuition & fees deduction versus education credits). Don’t always choose the biggest number since the two aren’t equal: deductions are a dollar for dollar reduction in taxable income while credits are a dollar for dollars reduction in tax payable. Additionally, sometimes phaseouts and other restrictions might apply to one and not the other. Take a few extra minutes to run the calculations both ways to determine how to maximize your savings. Don’t forget about mileage and other “small” things. Numbers add up. When you’re double-checking your
Filed under: Investing
President Obama released his budget proposal yesterday, and as expected, it included a number of new provisions that would dramatically change the tax laws once more, with impacts on taxpayers up and down the income scale. The Obama proposal comes as a clear disappointment to anyone who believed that the resolution to the fiscal cliff crisis at the beginning of the year would prove to be the last word on the tax front, but for those who want to see further revenue increases as part of a broader solution to address the national debt, the budget’s tax provisions address some of their concerns.
Let’s take a look at some of the budget’s most important tax proposals and the impact they could have on both individual and corporate taxpayers, as well as the businesses that serve them.
Limited tax savings for itemized deductions and municipal-bond interest
The biggest revenue-raising part of the Obama budget would limit the value of itemized deductions, including the mortgage interest deduction, to 28%. That would impact only high-income taxpayers above the $200,000 and $250,000 income thresholds for single and joint filers, respectively, costing them as much as 11.6 percentage points in tax savings. Because of the high-end focus, the impact on industries like the homebuilding sector that benefit from customers taking advantage of those deductions would be limited, with luxury-oriented companies Toll Brothers and Ryland more at risk than homebuilders aimed at lower price points.
Implementing the Buffett Rule
The budget also wants to ensure that those with taxable income above the $1 million mark pay an effective tax rate of 30%. The mechanics of implementing what’s become known as the Buffett Rule would include a phase-in of the tax for incomes between $1 million and $2 million, representing a further increase for those highest-income taxpayers with extensive deductions other than charitable contributions.
Lower inflation adjustments for tax-related provisions
The same proposal to link Social Security benefits to the chained Consumer Price Index would also have an impact on taxes. The budget would use the chained CPI to adjust tax brackets, personal exemptions, and standard deductions, leading to slower increases in those figures going forward. Unlike the limits on itemized deductions, the inflation adjustment provisions would affect all taxpayers.
Maximum amounts in IRAs and other retirement accounts
The budget would limit IRA, 401(k), and other tax-favored retirement balances to about $3 million. Combined with increases on carried-interest tax rates, this provision would capture hedge-fund managers and other investors who’ve used retirement accounts as successful high-growth investing vehicles.
A new cigarette tax
The Obama budget would hike federal taxes on cigarettes by $0.94 per pack. Altria and other cigarette manufacturers would inevitably get hurt by such an increase, as it would add yet another impediment to cigarette demand that has already been falling sharply for decades.
Lower estate tax exemptions
Filed under: Investing
We all procrastinate from time to time. That’s OK with relatively trivial things in life, like taking out the trash and unloading the dishwasher. But it’s not acceptable when it places your financial future in jeopardy.
The deadline for making a 2012 IRA contribution is April 15. So, with less than one week left, time is of the essence. Remedy the situation by opening an IRA and funding it today. Luckily for you, there are many online discount brokerage firms more than willing to help out. Several offer no annual maintenance fees, low-cost investing options, and a huge menu of stocks and mutual funds.
Providers that can help you at the last minute
What you desire in an IRA provider may point you to one discount broker instead of another. Here are some things to keep in mind when deciding what firm is best for you.
Discount brokerages offer very inexpensive stock-trading fees. Scottrade boasts extremely low $7 online trading fees. Trades at Fidelity and Charles Schwab will cost you as little as about $8 and $9 each, respectively. And TD AMERITRADE‘s and E*TRADE‘s $10 fees are only a hair more. Vanguard charges $7 for the first 25 stock and non-Vanguard ETF trades in each calendar year, then $20 for each subsequent trade. If you need extra help placing trades, TD AMERITRADE and Scottrade have local offices and offer broker assistance. And if you open an IRA and fund it with $2,500, ShareBuilder, a part of Capital One Financial , will give you 25 free trades.
As exchange-traded funds have become increasingly popular retirement account options, brokerage firms have tailored their lineups accordingly. Schwab rolled out commission-free ETFs a few years ago, but recently expanded its menu of offerings with its OneSource platform. Schwab’s OneSource boasts more than 100 different ETFs, including State Street‘s hugely popular SPDR ETFs. Fidelity’s recently expanded partnership with BlackRock now offers its customers the greatest number of commission-free ETFs online from iShares, including all 10 iShares Core ETFs. Not to be overlooked, TD AMERITRADE boasts over 100 commission-free, non-proprietary ETFs while Vanguard offers all of its Vanguard ETFs commission-free.
Most discount brokerage firms require no account minimums and charge no annual maintenance fees. Keep in mind that Schwab requires a $1,000 account minimum for an IRA, which is waived if you set up a direct deposit of at least $100 per month. Meanwhile, Fidelity obligates account holders to contribute $2,500 for an annual fee waiver, unless you direct deposit a monthly minimum of $200.
Before getting started, think about what you want from your IRA provider. Are you dead-set on iShares ETFs for your IRA? Are broker-assisted trades important to you? Do you intend to set up a monthly …read more
Source: FULL ARTICLE at DailyFinance
With less than a week to go to file your taxes, many tax-paying procrastinators are starting to get nervous about whether they’ll be able to get their returns done by deadline time. Getting a six-month extension to file is easy to do and gives you some clear advantages if you’re feeling crunched on time. But there are also some downsides to getting a tax extension. Let’s take a look at the pros and cons of getting an extension from the IRS.
The Pros of Getting an Extension
1. It’s easy and free.
All you have to do to get six extra months to file your taxes is to file a single form with the IRS. By completing IRS Form 4868, you’ll automatically get until Oct. 15 to get your returns filed. There’s no fee for the extension.
2. You’ll avoid a late-filing penalty.
Ordinarily, if you don’t file your return by April 15, you’ll pay a penalty of 5 percent of the tax you owe for every month that you’re late, with a maximum total penalty of 25 percent. Moreover, if your return is more than 60 days late, then the minimum penalty is either $135 or the balance of taxes you owe, whatever is smaller. If you file for an extension, however, you don’t get charged a late filing penalty as long as you file by October.
3. Your accountant might actually have time for you.
Trying to get professional help during April is always a challenge as CPAs and other tax pros scurry to get all their clients’ returns in. By extending, you can walk into your accountant’s office in May and have a much better chance of getting an appointment.
4. An extension isn’t an automatic audit red-flag.
Many taxpayers are afraid that by getting an extension, they’re inviting scrutiny by the IRS. But most of the time, an extension reduces your audit risk because you’re less likely to make the dumb mistakes that last-minute filers typically make.
5. You’ll get more time to reverse a Roth conversion and take advantage of other obscure rules.
One quirk of the tax laws is that if you converted a regular retirement account to a Roth IRA during 2012, you can undo that conversion at any time before your 2012 return is due. By filing for an extension, you get another six months before you have to decide. Undoing a Roth conversion can save you taxes if the value of your investments has fallen since the conversion, and with the market at all-time highs, many fear a potential downturn could be coming soon.
In addition, there are other less commonly used rules, such as funding a self-employed retirement plan, that are tied to an extended filing deadline. Getting an extension gives you more time to get those tasks done as …read more
Source: FULL ARTICLE at DailyFinance
Filed under: Investing
Retirees have become increasingly dependent on Social Security for the bulk of their retirement income. Yet even though most retirees have few other sources of income and rely on their retirement savings to supplement Social Security, current tax laws are designed to punish even Social Security recipients with modest incomes, with effective marginal tax rates of as much as 46%, topping what the highest-income taxpayers in the nation pay.
The strange taxation of Social Security
You won’t find a 46% rate explicitly written down anywhere in the tax code. But as a recent post from financial planner Michael Kitces explains, buried in the law are provisions that phase in taxes on Social Security benefits for those earning certain amounts of other income.
Here’s how it works. The IRS looks at your total taxable income and then adds in half of your Social Security benefits. For every $1 by which that figure exceeds $25,000 for single filers or $32,000 for joint filers, another $0.50 of your benefits get added to your taxable income. Once the figure exceeds $34,000 for singles or $44,000 for joint filers, the amount added to your income jumps to $0.85 per $1.
The net impact of those provisions can dramatically increase the tax rates that Social Security recipients pay. In some cases, those in the 15% tax bracket pay an effective marginal rate of almost 28%, while those in the 25% bracket pay more than 46%.
Are Social Security taxes fair?
Proponents of the tax argue that if you have enough other income, it’s only fair to add a tax on Social Security. But the big problem is that in determining the tax, taxable withdrawals from retirement accounts like traditional IRAs and 401(k)s are included in income. Essentially, those who’ve saved all their lives for their retirement get penalized for their smart financial planning.
Fortunately, there are steps you can take to minimize the impact:
- Use Roth IRAs. Roth IRAs are different from regular retirement accounts in that their distributions are tax-free. They also aren’t included in the income figure the IRS comes up with for deciding whether Social Security benefits are taxable, so using Roth assets can cut your tax bill even further.
- Invest in tax-smart funds and ETFs. Investors who use actively managed mutual funds often get hit with big distributions of income and capital gains that are taxable and thereby make them more susceptible to paying tax on their Social Security. But low-cost stock index funds Vanguard Total Stock , iShares Russell 2000 , and SPDR S&P 500 usually pay out only their annual income, generally avoiding capital gains and keeping your other-income figure lower.
- Time your IRA withdrawals. Keeping taxable income below the limit is smart if you can afford it, but many people need their IRA withdrawals to pay living expenses. For them, it may actually make sense to take …read more
Source: FULL ARTICLE at DailyFinance
Filed under: Investing
With just 10 days to go before your tax returns are due, procrastinating taxpayers are truly coming down to the last minute. But just because you’re late to the game doesn’t mean you should pay even a penny more in tax than you absolutely need to.
As a guide for late filers everywhere, here are five absolute last-minute things to keep in mind as you scurry to meet the April 15 deadline.
1. Attach only what you need to attach to your return.
Usually, the only forms you’ll attach with your return are W-2s from your work, and other forms that include amounts of tax that were withheld. Most other supporting documentation shouldn’t be attached, although you should make sure you retain them in your own records in case you’re audited.
2. Should you itemize or take the standard deduction?
Once you’ve calculated your total income, most taxpayers are allowed to take either a standard deduction, or to itemize specific deductible items. What’s important to remember is that you have a choice between those two options, and you can pick whichever one will save you the most. Making the wrong choice can cost you.
Most taxpayers who make this mistake take the standard deduction rather than itemizing, figuring that the standard deduction requires less work and has less audit risk. But if you’ve paid mortgage interest, made charitable donations, incurred real estate or state income taxes, or suffered casualty losses or extensive medical expenses during the year, knowing what you’d be entitled to if you itemized is crucial to saving as much as you can.
3. For paper returns, use certified mail to prove when you sent them.
If you wait until the last minute to file, being able to show that you filed on time can be important later on if something happens to your return in the mail. When you use certified mail, you’ll get a receipt with your postmark date on it, and the IRS treats that as proof of your filing as of that date — even if the IRS doesn’t receive the return until days later. Registered mail also works for the IRS, but it’s much more expensive. Of course, filing electronically avoids any chance of a paper return getting lost in the mail.
4. Think about 2013 estimated taxes, as well.
If you found that you didn’t have enough tax withheld from your paycheck last year to cover your tax bill, you may need to pay estimated taxes in 2013 to avoid penalties. If so, the first quarterly installment is due on the same date as your 2012 return — April 15. Use Form 1040-ES to calculate and pay your taxes.
5. Don’t forget that IRA!
If you’re still hunting for deductions, the easiest way to cut your tax bill is to open a traditional IRA. If you qualify, you can deduct up to $5,000 from your 2012 taxes — $6,000 …read more
Source: FULL ARTICLE at DailyFinance
Filed under: Investing
A Roth IRA can be your most powerful tool in saving for retirement. But to take advantage of this amazing wealth-building strategy, you need to be familiar with all the Roth IRA rules that define whether you can use it and how to make the most of it. Let’s take a look at the five most important Roth IRA rules to keep in mind.
Rule 1: Too much income means no Roth for you.
The first rule to keep in mind is that some people aren’t allowed to contribute to a Roth. For 2013, single filers with more than $127,000 in what’s known as modified adjusted gross income can’t make any contribution to a Roth, while those with incomes between $112,000 and $127,000 are stuck with reduced contributions. For joint filers, the similar limits are $178,000 and $188,000.
Rule 2: The amount you can contribute just went up.
Roth contribution limits are indexed for inflation, and in 2013, they went up. Now, you can put $5,500 into your Roth IRA, and if you’re 50 or older, you can add another $1,000 on top of that. If you haven’t made a contribution for 2012 yet, you still have until April 15 to do so — the limits for last year are $5,000 and $6,000, respectively.
Rule 3: Anyone can convert a traditional IRA to a Roth.
It used to be that income limits prevented some taxpayers from converting existing traditional IRAs to Roth IRAs. But in 2010, those rules went away, and now, anyone can convert. Just keep in mind that converting to a Roth usually creates immediate tax liability, as you have to include the amount converted in your taxable income for the year of the conversion. Given the tax-free benefits of Roth IRAs, paying extra tax now might be worth it, but you still have to run the numbers.
Rule 4: Be careful when you take distributions from your Roth IRA.
If you do everything right, money you take from your Roth will always be tax-free. But complicated rules govern withdrawals from Roth IRAs, and if you’re not careful, you can turn tax-free income into taxable income or even have to pay penalties. In general, you can withdraw your initial contributions at any time without penalties or tax consequences, but if you take out earnings within the first five years you have the account or before you turn 59 1/2, you’ll owe a 10% penalty unless it qualifies for exceptions such as disability, first-time home costs, or higher-education expenses.
Rule 5: Be smart about beneficiaries.
If you plan to use up your Roth IRA assets before you die, then worrying about beneficiaries may seem silly. But Roth accounts can be great estate planning tools because they allow your heirs to take advantage of their tax-free benefits as well. So in choosing a Roth beneficiary, be sure to take into account the fact that your chosen heirs …read more
Source: FULL ARTICLE at DailyFinance
Filed under: Spending
April is Financial Literacy Month and our goal is to help you raise your money IQ. In this series, we’ll tackle key economic concepts — ones that affect your everyday finances and investments — to help you make smarter choices with every dollar decision you face. Stick with us, and you’ll end April financially smarter than you were when the month began.
Here’s a vital concept to understand: cash flow.
The meaning of the term varies depending on context. In the accounting world, for example, it refers to the change in a company’s cash level over a specific period of time. If a company’s cash level rises during that period, it’s exhibiting positive cash flow. If it shrinks, negative cash flow.
When investors study companies to see if they might be good fits for their portfolios, they may assess “free cash flow.” That reflects a company’s cash flow from its operations after it pays all its expenses. Free cash flow can be viewed as the lifeblood of a company.
Negative free cash flow means a company is burning through its cash — a la J.C. Penney (JCP), Sears Holdings (SHLD), and Radio Shack (RSH), all of which have recently been sporting negative free cash flow.
While negative free cash flow can be viewed as a red flag in the investing world, it’s not necessarily a portent of doom. It all depends on what the company is spending its money on. Consider Netflix (NFLX), for example. Its free cash flow recently turned negative, but it has been investing heavily in its business, enlarging its catalog, and creating original programming, such as the well-received “House of Cards.”
Cash flow in our lives
The cash flow concept isn’t just useful for companies. It can also be applied to personal finances and can give you a better handle on how you’re doing money-wise.
To assess your personal cash flow, grab your bank account statement and jot down the cash you had on hand at the end of the past few months or quarters. (If you have multiple bank accounts and/or coffee cans stuffed with money, include those as well.) A glance at those sums will reflect whether you’re building cash value or shedding it.
Your cash flow doesn’t represent your total financial health, though. That’s a topic for another day. After all, you might have a modest amount of cash in the bank but no debt, a robust stock portfolio, solid retirement savings, and a big chunk of equity in your house.
Tracking your cash flow, however, can be a big eye opener.
Corral your cash and see which way …read more
Source: FULL ARTICLE at DailyFinance
Everyone is talking about the red-hot stock market. We are at new all-time highs and the Dow has turned in its best first quarter since 1998. But what no one is telling individual investors about their 401(k), Roth or traditional IRA is that, even if 100% of your money was invested, and you rode this entire rally up to this point, you could still miss out on these massive gains. …read more
Source: FULL ARTICLE at Forbes Latest
Filed under: Investing
As of this writing, we’re less than two weeks away from the deadline for 2012 IRA contributions. IRAs, or Individual Retirement Arrangements, are an absolute must in saving for retirement. IRAs allow individuals to save for retirement and not pay taxes on their investments as they grow, but to make proper use of them, you need to know the IRA contribution limits that apply to these tax-favored accounts.
The two basic types of IRAs
Traditional IRAs allow your investments to grow tax-free until they are withdrawn. Contributions to traditional IRAs can be tax-deductible depending on whether you have a retirement plan through work and on your income level.
Roth IRAs also allow your investments to grow tax-free; however, contributions are never tax-deductible. The benefit of Roth IRAs is that withdrawals can be tax-free as long as you meet certain requirements.
IRA contribution limits
If you can save enough to do so, it’s well worth it to contribute up to the maximum allowed. However, you should only contribute if you don’t foresee yourself needing the money until you retire. You pay a penalty on traditional IRA withdrawals before the age of 59 1/2, except under limited circumstances. Roth IRAs are somewhat freer about allowing withdrawals of your original contributions under certain circumstances, but it’s still smarter to keep money within the account until retirement.
You can contribute to traditional IRAs only until you are 70 1/2, while there’s no age limit on Roth IRA contributions as long as you have earned income.
The IRA contribution limit is whichever is less: an individual’s total earned income or the amount shown in the following table.
IRA Contribution Limits for 2012 and 2013
Under Age 50
Age 50 or older
Roth IRA contribution limits
Roth IRA contribution limits are the same as for traditional IRAs; however, if you earn more than a certain amount, then you may not be allowed to contribute to a Roth IRA at all, or may only be allowed to contribute a reduced amount. This is based on your filing status as well as your Adjusted Gross Income or AGI.
Roth IRA contribution limits for 2012
Note the middle categories ranging from $173,000 to $183,000 of AGI for joint filers and from $110,000 to $125,000 for single filers. You can find details of the calculation of reduced contribution limits for 2012 Roth IRAs here.
Roth IRA contribution limits for 2013
The middle categories for 2013 have been adjusted upward for inflation. You can find details of the calculation of reduced contribution limits for 2013 Roth IRAs here.
If you have more questions on IRAs, check out The Motley Fool’s IRA center.
Or, if you need to open an IRA, head over to our broker center where you can compare online brokers.