Fortunately, Dec. 31 is not the final decision date for what we do with our individual retirement accounts – the final 2007 IRA contribution deadline comes on April 15 next year – but it’s a good time to review the do’s and don’ts of successful IRA management.
Mistake No. 1 – Failure to start: Do you have either a traditional or Roth IRA as part of your retirement strategy? If not, get some advice – a Certified Financial Planner™ professional is a good start – to review your overall retirement options and give you some ideas where to start.
Mistake No. 2 – Not comparing the advantages of traditional IRAs and Roth IRAs: The biggest differences between a traditional IRA and a Roth is the way Uncle Sam treats taxes on both types of IRA investments. If you put money in a traditional IRA, you’ll be able to deduct that contribution on your income taxes. In a Roth, you don’t receive the tax deduction for those contributions, but when it’s time to take the money out, you won’t have to pay taxes on it.
Mistake No. 3 – Forgetting income limits for a Roth IRA: The income limits for establishing a Roth are as follows: for a married couple filing jointly or a qualified surviving spouse, you can’t contribute if your modified adjusted gross income exceeds $166,000; if you’re filing single, you can’t contribute if your modified AGI exceeds $114,000, and for married people filing separately, you can’t contribute if your modified AGI exceeds $100,000. If you exceed those income limits and make a deposit, you might be subject to a penalty.
Mistake No. 4 – Failing to make sure your beneficiaries are correct: Starting in 2007, a direct transfer from a deceased employee’s IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity, 403(b) plan or a governmental deferred compensation plan to any qualified IRA can be treated as an eligible rollover distribution if the beneficiary is not the deceased’s spouse. That means your kids or any other designated recipient can inherit your IRAs without negative tax consequences at that time. Non-spouse beneficiaries need to check with a tax expert when they must begin distributions from an inherited IRA. Of course, no matter what the investment, make sure your beneficiaries are always current.
Mistake No. 5 – Not knowing the maximum contribution: For both traditional and Roth IRAs, the maximum annual contribution for 2007 is $4,000 unless you are age 50 or older, when you can add an additional $1,000 to that total. But review the income limits for contributions as you go.
Mistake No. 6 – Frittering away your tax refund: Did you know you could deposit your tax refund directly into your IRA? It works for a health or education savings account as well. While many people use their tax refund as a bonus to buy a treat or pay off bills, consider filing your taxes a bit early and arrange to e-file a direct deposit to your IRA so you can note that deposit for the 2007 tax year by next April 15.
Mistake No. 7 – Forgetting retirement savings benefits for active military personnel: The 2006 Heroes Earned Retirement Opportunities (HERO) Act allows active military personnel and their families to put a potentially greater contribution toward their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income to determine the contribution amount for traditional and Roth IRAs – it hadn’t before. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA. This change is retroactive to 2004 and affected military personnel have until May 28, 2009 to make their contribution, though amended returns may be filed.
Mistake No. 8 – Withdrawing money early from an IRA of blowing a rollover: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59 ½ years old and do not put it back into an IRA within 60 days. When moving assets, most of the time a trustee-to-trustee transfer can be more efficient and with less margin for error. If the IRA distribution check is made payable to you, there is a greater chance you’ll miss the 60-day deadline and you’ll face taxes and penalties.
December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Thursday, December 20, 2007
Wednesday, December 12, 2007
Say Goodbeye to 2007 with Some Smart Tax Moves
December’s a busy month, but it’s not too late to focus on last-minute tax savings. Consult a tax or financial advisor such as a Certified Financial Planner™ professional to see if these might work for you:
Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.
Check investment gains and losses: If you have some capital losses in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you've realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.
Prepay property taxes: If it makes sense to accelerate that deduction, pay those early 2008 taxes before the end of the month.
Prepay state taxes: Again, if it makes sense based on your tax situation, consider making a fourth-quarter estimated state tax payment due in January this month to accelerate the deduction.
Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2007 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.
Got time to go green? December isn’t exactly everyone’s favorite month for home renovations, but if you are inclined to replace windows, insulation or heating/air conditioning systems that meet particular energy conservation standards, you might qualify for a credit up to $500.
Consider the sales tax/income tax tradeoff: Taxpayers in 2007 will again have the option of claiming either state income tax paid or state sales taxes paid as itemized Schedule A deductions. If your state doesn’t have an income tax, definitely start totaling all the sales taxes you’ve paid. However, if you do pay a state income tax but have purchased such big-ticket items as cars, boats or construction supplies and equipment during the year, run the numbers anyway. The total sales tax deduction is figured on an amount from the IRS state sales tax tables in addition to the actual sales tax amounts paid on the major purchase items. The alternative is to ignore the IRS Tables, and simply add up all sales tax payments.
Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year, you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.
Make sure donations are documented: As of January 1 this year, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.
December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.
Check investment gains and losses: If you have some capital losses in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you've realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.
Prepay property taxes: If it makes sense to accelerate that deduction, pay those early 2008 taxes before the end of the month.
Prepay state taxes: Again, if it makes sense based on your tax situation, consider making a fourth-quarter estimated state tax payment due in January this month to accelerate the deduction.
Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2007 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.
Got time to go green? December isn’t exactly everyone’s favorite month for home renovations, but if you are inclined to replace windows, insulation or heating/air conditioning systems that meet particular energy conservation standards, you might qualify for a credit up to $500.
Consider the sales tax/income tax tradeoff: Taxpayers in 2007 will again have the option of claiming either state income tax paid or state sales taxes paid as itemized Schedule A deductions. If your state doesn’t have an income tax, definitely start totaling all the sales taxes you’ve paid. However, if you do pay a state income tax but have purchased such big-ticket items as cars, boats or construction supplies and equipment during the year, run the numbers anyway. The total sales tax deduction is figured on an amount from the IRS state sales tax tables in addition to the actual sales tax amounts paid on the major purchase items. The alternative is to ignore the IRS Tables, and simply add up all sales tax payments.
Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year, you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.
Make sure donations are documented: As of January 1 this year, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.
December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, December 5, 2007
Business Not So Good? Here’s How to Protect Against Job Loss in a Financial Plan
In September, Chicago outplacement firm Challenger, Gray & Christmas announced that August layoffs had rocketed 85 percent to 79,459 in August from 42,897 in July, continuing a steady march upward in job cuts since spring.
What does this mean to you? As Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.”
So, are you ready for a depression?
A financial advisor such as a Certified Financial Planner™ professional will insist you build a cushion in case of job loss – it’s part of their job to make sure you understand the worst-case financial scenarios in all areas of your life. Even if times are good at your employer, use these stress-free moments to plan for a rainy day:
Build that emergency fund: If you don’t have 3-6 months worth of living expenses already saved in an interest-bearing account for emergencies, start socking it away. Try to find an account with an automatic deposit feature so you never have to worry about missing a week of savings. And make this account separate from any other savings or investment account. Wondering where you’ll find that extra money? Start tracking your spending and you may readily notice areas where you can economize.
Slash your high-interest debt: While times are good, cut your spending so you can eliminate credit card, auto and home equity debt – these are the kinds of debt that are particularly punishing if you’re out of work. The sooner you can learn to manage debt and use it only for reasonable purposes, the sooner you’ll be on your way to a savings and investment cushion that will protect you in good times and bad.
Keep networking: It’s always a good idea to get to know your peers in the city or town where you work. It’s particularly wise to make the time to network while you’re still employed because you might get the lead on your next job well in advance of the time when you may need it. The money you spend on membership in a group or association key to your industry may be the best money you’ve ever spent. Plus, it may be tax-deductible.
Get a line of credit while you’re still working: If you own a home, consider taking out a home equity line of credit and vow never to touch it unless you run into a serious cash flow problem if you lose your job. If you don’t touch it, it won’t cost you anything. Make sure you apply for the line while you’re still working – lenders want to see that steady salary.
Use your company’s education dollars: Sharpen your skills on the company dime. Take classes that will improve your skills at this company or other employers down the line. You might get a promotion with those added smarts, and that could make you more invaluable to your employer.
Apply for disability coverage while you’re still working: Personal disability coverage is increasingly important as companies continue to pare benefits. Group disability coverage can be threadbare if you have a lengthy illness or disability. Plus, it makes sense to buy personal disability coverage based on your current income. You won’t be able to buy as much if your income goes down.
Apply for your child’s college financial aid while you’re working: If you have a child in college or ready to go to college, make sure you have filled out the FAFSA – the Free Application for Student Financial Aid – on time. Even if you don’t need the money now, there are hardship forms that can be filled out later in case your child needs the aid and you’re without a job. Even if you’re in relatively good shape now with your child’s tuition now, consider this college insurance for your kid.
Understand your benefits: If you are laid off, you will qualify for a continuation of your employer’s health insurance benefits through COBRA. The federal Consolidated Omnibus Budget Reconciliation Act allows an individual to buy coverage from his former company for 18 months (or more in certain situations) due to employment termination or reduction of hours of work. You’ll end up paying the amount of your total premium since the boss doesn’t have to pay his share anymore, but at least your coverage won’t change. If you’re married, see if you can switch to your spouse’s health coverage – it might save more money than going COBRA. Also, check out what your unemployment benefit will be ahead of time so you can budget.
Stay away from your 401 (k): The possibility of losing your job is an excellent reason never to take out a 401 (k) loan. You’ll need to pay it back before your last day at work. And don’t even think about tapping retirement savings if things get tough. Find another way to shore up your cash flow – take on a part-time job if necessary until you find your next full-time position. It’s not uncommon for a part-time or temporary position to lead to a rewarding full-time job.
November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
What does this mean to you? As Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.”
So, are you ready for a depression?
A financial advisor such as a Certified Financial Planner™ professional will insist you build a cushion in case of job loss – it’s part of their job to make sure you understand the worst-case financial scenarios in all areas of your life. Even if times are good at your employer, use these stress-free moments to plan for a rainy day:
Build that emergency fund: If you don’t have 3-6 months worth of living expenses already saved in an interest-bearing account for emergencies, start socking it away. Try to find an account with an automatic deposit feature so you never have to worry about missing a week of savings. And make this account separate from any other savings or investment account. Wondering where you’ll find that extra money? Start tracking your spending and you may readily notice areas where you can economize.
Slash your high-interest debt: While times are good, cut your spending so you can eliminate credit card, auto and home equity debt – these are the kinds of debt that are particularly punishing if you’re out of work. The sooner you can learn to manage debt and use it only for reasonable purposes, the sooner you’ll be on your way to a savings and investment cushion that will protect you in good times and bad.
Keep networking: It’s always a good idea to get to know your peers in the city or town where you work. It’s particularly wise to make the time to network while you’re still employed because you might get the lead on your next job well in advance of the time when you may need it. The money you spend on membership in a group or association key to your industry may be the best money you’ve ever spent. Plus, it may be tax-deductible.
Get a line of credit while you’re still working: If you own a home, consider taking out a home equity line of credit and vow never to touch it unless you run into a serious cash flow problem if you lose your job. If you don’t touch it, it won’t cost you anything. Make sure you apply for the line while you’re still working – lenders want to see that steady salary.
Use your company’s education dollars: Sharpen your skills on the company dime. Take classes that will improve your skills at this company or other employers down the line. You might get a promotion with those added smarts, and that could make you more invaluable to your employer.
Apply for disability coverage while you’re still working: Personal disability coverage is increasingly important as companies continue to pare benefits. Group disability coverage can be threadbare if you have a lengthy illness or disability. Plus, it makes sense to buy personal disability coverage based on your current income. You won’t be able to buy as much if your income goes down.
Apply for your child’s college financial aid while you’re working: If you have a child in college or ready to go to college, make sure you have filled out the FAFSA – the Free Application for Student Financial Aid – on time. Even if you don’t need the money now, there are hardship forms that can be filled out later in case your child needs the aid and you’re without a job. Even if you’re in relatively good shape now with your child’s tuition now, consider this college insurance for your kid.
Understand your benefits: If you are laid off, you will qualify for a continuation of your employer’s health insurance benefits through COBRA. The federal Consolidated Omnibus Budget Reconciliation Act allows an individual to buy coverage from his former company for 18 months (or more in certain situations) due to employment termination or reduction of hours of work. You’ll end up paying the amount of your total premium since the boss doesn’t have to pay his share anymore, but at least your coverage won’t change. If you’re married, see if you can switch to your spouse’s health coverage – it might save more money than going COBRA. Also, check out what your unemployment benefit will be ahead of time so you can budget.
Stay away from your 401 (k): The possibility of losing your job is an excellent reason never to take out a 401 (k) loan. You’ll need to pay it back before your last day at work. And don’t even think about tapping retirement savings if things get tough. Find another way to shore up your cash flow – take on a part-time job if necessary until you find your next full-time position. It’s not uncommon for a part-time or temporary position to lead to a rewarding full-time job.
November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
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