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HOW TO RETIRE WEALTHY …
By SEEMA RAMROOP
Anyone can retire wealthy if they set goals at a young age and put a plan in place to reach those goals. Becoming wealthy does not come without sacrifice but it can be done if you restrict your spending and wisely invest your money over the course of a lifetime.
Always work on saving a good portion of every paycheck and investing it. Always work with a professional or if you can do it yourself go ahead.
How could someone who makes a below average wage become a millionaire? The answer lies in what is called the time value of money. Time + the rate of return = Wealth. Consistently investing in the stock market, bonds, or even bank CD(s) can generate substantial wealth over your lifetime.
Invest half your money in diversified bonds and the other half in stocks every month in a tax deferred account. Invest enough to meet your retirement goals with the understanding that you will live off the interest in retirement.
Start as young as possible or as soon as possible. Time is your friend when it comes to investing. Consider the return in twenty year periods of time vs. every day, quarter or year. Look at stocks and bonds over time as they offer the best returns and chance that inflation won't outpace your gains.
When it comes to investments, do not put all your eggs in one basket. Do not put your money in any one stock but rather buy a diversified mix.
Don't be afraid of stocks. The key is to have a long time horizon and not watch the day to day swings. The market will go up and down in wild fashion as it has done in the past and will do in the future. It is still a fantastic way to participate in your own wealth building.
Seema Ramroop, Financial Advisor at Morgan Stanley Smith Barney in Palm Harbor, can be reached at (727) 773-4629 or email email@example.com
NEW HIRE ACT SIGNED BY THE PRESIDENT
By KAMLESH H. PATEL, CPA
The new Hiring Incentives to Restore Employment Act (HIRE Act), signed by President Obama on March 18, creates new tax breaks for employing certain workers as well as extending the higher Section 179 “expensing” allowance for another year. Here’s a summary of the two key provisions.
Hiring incentives. Under the new law, an employer may be exempt from paying the 6.2 percent Social Security tax for qualified unemployed workers. The new hire must begin employment after Feb. 3, 2010, and before Jan. 1, 2011. But this tax break isn’t available to workers who are related to the employer. To qualify, a worker cannot have been employed for more than 40 hours during the previous 60 days ending on the start date. The exemption applies to both part-time and full-time workers.
In addition, an employer may claim tax credits for retaining these workers for at least 52 consecutive weeks. Each credit equals the lesser of $1,000 or 6.2 percent of the employee’s wages paid during the 52-week period.
Expensing limit. The new law extends the maximum $250,000 deduction for business property placed in service in 2010. Without this extension, the 2010 deduction would have been limited to $134,000. The new law also keeps the $800,000 phase-out level in place.
Caution: The new law doesn’t extend the “bonus depreciation” tax break.
The cost of the new law’s tax breaks are offset by new foreign compliance tax rules, another delay in the worldwide interest allocation rules, and accelerated corporate estimated tax payments.
Finally, the new law doesn’t include extensions of other expired tax provisions, a “patch” for alternative minimum tax relief, or estate tax reinstatement. Congress is expected to pass legislation on these issues eventually.
DON’T RISK AN ESTIMATED PENALTY
Even if you just filed your 2009 tax return, now is the time to start worrying about your 2010 tax liability.
If you don’t pay the requisite amount of tax during the year — through any combination of income tax withholding or quarterly installment payments — you may be liable for an “estimated tax” penalty. For many taxpayers, simply having your employer adjust your withholding will suffice. But others, such as self-employed individuals, S corporation shareholders and retirees must pay part or all of the tax in quarterly installments.
The first installment for 2010 is due on the same date as your 2009 return — April 15. The other due dates are June 15, Oct. 15, and Jan. 18, 2011. (The quarterly due date is postponed to the next business day if it falls on a weekend or holiday.)
If you fail to comply with these rules, the IRS can assess an underpayment penalty on the difference between the amount paid and the amount owed. But you can avoid the penalty by using either one of these two “safe-harbor” methods:
1. Your annual payments equal at least 90 percent of your tax liability for 2010.
2. Your annual payments equal at least 100 percent of your tax liability for 2009. The percentage increases to 110 percent if your adjusted gross income (AGI) for 2009 exceeded $150,000.
This second method is easier to use because you already know the amount of your 2009 tax liability. Other special rules may apply if you receive most of your income on a seasonal basis.
Finally, no penalty will be assessed if your tax liability for 2010 is less than $1,000 or you had no tax liability for 2009.
SHOULD YOU CONVERT TO A ROTH IRA IN 2010?
Due to a tax law enacted in 2006, certain high-income taxpayers will finally be able to convert a traditional IRA into a Roth IRA in 2010. But the decision to convert this year is not always as clear-cut as it first appears.
A Roth IRA offers several benefits to retirement-savers. For a Roth in existence at least five years, any “qualified distributions” are 100 percent tax-free. Qualified distributions include withdrawals that are made after age 59½, on account of death or disability, or used for first-time homebuyer’s expenses (up to a lifetime limit of $10,000). Also, unlike a traditional IRA, mandatory distributions are not required after age 70½ for Roth IRAs.
If you convert a traditional deductible IRA to a Roth, you must pay tax on the converted amount at ordinary income rates. When converting a nondeductible IRA to a Roth, the earnings are subject to tax. The current top tax rate is 35 percent.
Previously, a conversion was not allowed if your modified adjusted gross income exceeded $100,000. But the 2006 tax law change repealed this dollar cap, effective January 2010. Furthermore, if you convert to a Roth in 2010, the taxable income portion of the conversion may be split evenly over the following two years — 2011 and 2012.
Despite these advantages, a Roth IRA conversion requires careful consideration. For instance, if you must use funds in your traditional IRA to help pay the tax liability, you’re effectively reducing the future Roth benefits. Other factors — such as your age and health status, projected rates of return, the potential for higher tax rates, and state tax implications — could affect the outcome. In some cases, a partial conversion may be the optimal approach.
Online calculators may provide insight, but they often do not reflect all the relevant factors.
HEALTH REFORM & HIRE ACT — TWO NEW LAWS — WHAT’S IN IT FOR YOU?
By AMOL NIRGUDKAR, CPA
2010 will mark the end of this decade. The decade will be remembered by many as Washington’s glory period for new tax legislation. There have been 24 new tax acts over the last 10 years that have overhauled our tax code and made it into one of the most complex treatises ever written. The pace of change and complexity of the regulations have befuddled Americans and many of them have gotten progressively intimidated by the enormity of modern tax compliance. Even tax attorneys and CPAs have spent countless hours in continuing education trying to understand each new law and apply it to the benefit of their clients.
The purpose of this article is to analyze two recent pieces of legislation that became law recently and discuss the impact on 2010 taxes.
On March 18, 2010, the president signed into law the “Hiring Incentives to Restore Employment Act of 2010” (aka the HIRE Act). Its was stated in the title — to stimulate employment and make a dent in the 9.7 percent unemployment rate that is looming like a dark cloud on the United States economy. In hopes of encouraging employers to hire and retain unemployed workers, the HIRE act provides two basic tax breaks:
1) Payroll tax holiday — Exempts employers from paying employers share of the Social Security employment taxes on wages paid in 2010 on newly hired unemployed workers. The tax holiday applies to workers hired after Feb. 3, 2010 and before Jan. 1, 2011 provided the workers were unemployed for at least 60 days before hire date. The payroll tax paid by the employer on wages after March 19, 2010 will be exempt from the 6.2 percent Social Security tax for the remainder of the wages for 2010.
2) Retention incentive — As an additional incentive to retain the qualified unemployed workers, the act provides an additional $1,000 tax credit if the workers maintain employment for 52 consecutive weeks.
In addition to the employment incentives, the HIRE act also extends Section 179 deduction until Dec. 31, 2010. Section 179 allows qualifying businesses to deduct up to $250,000 in qualified asset purchases in 2010.
On March 23, 2010, the president also signed two controversial healthcare bills – Patient Protection and Affordable Care Act (aka Health Care Act) and the Health Care and Education Reconciliation Act (aka Reconciliation Act). Both acts aim to reform the current unsustainable health care system in the United States and offer affordable health coverage to all Americans.
The centerpiece of the legislation is the mandate that requires most United States residents to obtain health insurance. There are a host of other provisions ranging from new penalties for not carrying health insurance, large employer mandates to offer coverage, voucher system for lower income employees, “simple” cafeteria options for small businesses, etc.
Most of the mandate and other provisions go into effect in years 2014 and beyond. However, starting in 2010, small businesses that offer and pay for at least 50 percent of the health coverage for their employees get a tax credit equal to 35 percent of the premiums paid in 2010, 2011, 2012 and 2013. The credit increases to 50 percent for years beginning after 2013 for employer’s non-elective contributions towards employees’ health insurance premiums. Another provision of the health bill that affects 2010 is the new 10 percent tax on indoor tanning services.
The fate of this health legislation in future years and its impact on Americans is hard to predict and many of the provisions could possibly change in the next few years. The November elections and the presidential election in 2012 could be contributing factors to future amendments. All of us can hope and wish that these new laws actually do make health care affordable to all Americans while maintaining quality of care.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC and a partner at Reliance Wealth & Trust Partners LLC and can be reached at (813) 931-7258 or via email at firstname.lastname@example.org
TAKING A FRESH LOOK AT YOUR 401(k) ALLOCATIONS
By DEV GOSWAMI, CFP®
A May 2009 survey by Hewitt Associates noted that despite record losses in their 401(k) savings in 2008, individuals stuck with their 401(k) plans. However, more people dealt with their worry about investment conditions by shifting money into more conservative investments. In addition, a significant number of companies either eliminated or cut back significantly on matching employee 401(k) contributions.
Hewitt's annual Universe Benchmarks study, which examines the saving and investment behaviors of more than 2.7 million employees eligible for 401(k) plans, showed that the average 401(k) balance dropped from $79,600 in 2007 to $57,200 at the end of 2008. 44 percent of employees lost 30 percent or more of their savings. Only 11 percent of employees were able to break even or see a gain in their 401(k) portfolios. Even still, 74 percent of employees participated in their 401(k) plans in 2008, about the same as in 2007.
However, the Hewitt survey stated that some workers are reacting to the market downfall by moving 401(k) assets into less risky investment funds to try and blunt their losses. In 2008, 19.6 percent of investors made trades in their 401(k) plans versus 18.7 percent in 2007. And the volume of money they transferred in 2008 was much higher. Nine of the 10 most active trading days were the day after a large downturn in the market, or days with an average return of negative 4 percent. Employees' average equity exposure dropped to just 59 percent in 2008—which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds, which are considered less risky investments, experienced an 11 percent increase in asset allocation in 2008.
That’s why it might be wise for investors to get a fresh start with 401(k) advice as the economy improves. For existing investors or those who have never begun to save or invest for retirement, it might be time to consult both financial and tax experts such as a CERTIFIED FINANCIAL PLANNER™ professional to make sure both personal and work-related retirement savings complement each other.
Some recommendations to keep in mind:
Save even if your company fails to match: This is not the easiest thing to do, but even if your company cuts back on matching, it’s important to try and put additional money into personal retirement investments outside of work. You will still realize the benefit of pre-tax contributions made to your traditional 401(k). And, when you have money automatically taken from your paycheck you are “dollar cost averaging”. That means the fixed dollar amount that comes from your paycheck buys more shares when prices are low, and fewer when prices are high. Thus your average cost per share is lower than the average price per share.
Make sure you contribute to a plan: According to 2006 data from the Profit Sharing/401(k) Council of America, more than 22 percent of eligible workers don’t participate in available 401(k) plans. For the companies that are still matching, that’s like giving up free money.
Continue to save while you wait to join a plan: A significant number of companies don’t let you join the 401(k) until you’ve been working there a year. If that’s the case, get in the habit of putting money away for retirement anyway. Start an individual IRA with the funds you would put in the company plan, or set aside money in a savings account so you can supplement your cash flow and put the maximum amount into your 401(k) once you’re allowed to join.
Contribute the maximum: Not every employee can afford to contribute the maximum allowed by the plan, but try. In 2009, the maximum 401(k) contribution will be $16,500, and those older than 50 can make an additional catch-up contribution of $5,000.
Don’t let your company do all the work: More companies are automatically enrolling their workers in their 401(k) plans, but some workers fail to take charge afterward. They don’t know how much they’re allowed to contribute and they don’t discuss or review the types of investments they have in relation to their age or retirement plans. It might make sense to bring an outside investment advisor such as a CFP® professional to review those choices with you.
Avoid poor diversification over time: It’s necessary to do a yearly checkup on all your retirement savings – 401(k) s, individual IRAs and other investments fueling your retirement goals to make sure you’re on track.
Don’t rely on the 401(k) alone: Particularly if matching lags for awhile, 401(k) plans can’t be relied upon as a single source of retirement dollars. You must invest outside your company plans.
Don’t over-invest in company stock: Most financial planners advise that you put no more than 15 to 20 percent of your whole 401(k) portfolio in company stock.
Don’t borrow from the 401(k): The Employee Benefit Research Institute® reports that employees contribute more to plans that let them borrow. Don’t be fooled. A 401(k) shouldn’t be a house fund or a source of emergency cash. You’re taking money out of the account that otherwise would grow tax-deferred, and if you fail to pay back the money, you could face income taxes and penalties. Instead, build an outside emergency fund of three to six months of living expenses you can draw from.
Don’t cash out: Some workers think it’s a great idea to treat a 401(k) as a windfall for when they quit a job. Don’t do it. You’ll pay huge penalties and lose your retirement savings momentum.
Don’t “lose” your old 401(k) accounts: Maybe you’ve changed jobs several times and never got around to moving older, smaller 401(k) accounts from past employers to current ones or into a self-directed retirement account. Always get advice about 401(k) funds when you leave an employer.
This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Dev Goswami, CFP®, a member of FPA in Jacksonville, who offers securities through: The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, OH-4524, and Investment Advisory Services through: O.N. Investment Management Company. He can be reached at (904) 565-2969, email email@example.com or visit www.DevGoswami.com
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