Financial Abundance

Would you like to discover a way to reduce your 2008 taxes? Funding an IRA between now and April 15 is one of the few remaining methods to reduce last year’s taxable income. Let’s look at three popular IRAs to determine if a year-end contribution is appropriate for you.

For someone who is self-employed, a SEP IRA is often the best way to reduce your taxable income and save for retirement. If your company is an S or C Corporation, you can contribute up to 25% of your W-2 income to a SEP IRA. With a sole proprietorship or an LLC your maximum contribution is 20% of your income. In either case, the maximum annual contribution is $46,000 for 2008.

If you have any employees, you must contribute the same percentage of income for any employee that is over 21, has worked for you for at least 3 years and receives at least $550 in annual compensation.

If you have no self employment income, you may be able to contribute to a traditional, deductible IRA or to a Roth IRA. To determine if you qualify for an IRA contribution, let’s look at the rules for each type of IRA.

To contribute to a traditional IRA, you must be under 70½ years old and you(or your spouse) must have earned income. In 2008, your maximum IRA contribution is $5,000 ($6,000 if you are over age 50).

If you are covered by a company retirement plan, you can deduct the maximum amount when your Adjusted Gross Income (AGI) is no more than $53,000 as a single tax payer or $85,000 as a joint filer. If your spouse has no earned income, they can contribute the maximum amounts to their own IRA, even when you are covered by a company retirement plan, as long as your AGI is under $159,000.

To contribute to a Roth IRA, your Adjusted Gross Income (AGI) must be less than $101,000 as a single filer or $159,000 as a joint tax filer. Your maximum Roth IRA contribution is $5,000 ($6,000 if you are over age 50). However, if you make any traditional IRA contributions, the maximum Roth contribution amount is reduced by the amount that you contributed to the traditional IRA.

Based on IRS rules, the decision on which IRA to fund is often obvious:

1. If you are not covered by a company retirement plan and, as a single filer have an AGI over $101,000 or as a joint filer have an AGI over $159,000, you can only fund a traditional IRA.

2. If you are covered by a company retirement plan and your AGI is over $85,000 but less than $159,000 as a joint filer or over $53,000 but less than $101,000 as a single filer, you can only fully fund a Roth IRA.

3. If you are over 70½ and have earned income, you can only fund a Roth IRA.

Funding a Roth IRA has the following advantages over a traditional IRA:

1. When buying your first home, a Roth IRA allows the withdrawal $10,000 of growth and income plus all of your contributions, with no taxes or penalties on the withdrawal.

2. For people under age 40, the tax free growth and withdrawal of funds during retirement often make Roth IRA contributions a better, after-tax choice.

3. When funds are required before age 59½, a Roth IRA typically allows the withdrawal of Roth contributions with no taxes or penalties on the withdrawal.

4. A Roth IRA in your estate is an excellent method of passing tax free funds to younger generations.

If there are no compelling reasons to chose a Roth over a traditional IRA, decide on whether you wish to reduce your current taxes with a traditional IRA or reduce your taxes during retirement with a Roth IRA.

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With the market turmoil, I have read several articles about how people are no longer going to be able to retire when they had planned, due to losses in their 401(k) plans and other investments. Last month, I showed you how to test the safety of your 401(k) plan. This month, let’s look at what you can do to help assure that you can maintain financial abundance throughout your retirement .

The biggest mistake that people make with retirement is not adequately planning for this important life event. For earlier generations, retirement often took care of itself. When a person reached age 65, they would retire and live off the income provided by their corporate pension, Social Security and their savings. These sources of income, combined with life spans that seldom reached age 80, provided most people with adequate retirement income.

Today, this approach to retirement is no longer available to most Americans. Not only are corporate pensions a relic of the past, over the past 20 years, Americans have chosen to increase consumption and reduce savings. Thus, only a precarious Social Security payment remains as a staple for retirement.

When I was a business executive, an undisputed business principle was: “failing to plan is planning to fail.” If we did not have a business plan, against which our business was executing, our business venture would likely fail, especially when we went through down business cycles. Today, I see the same problem as people face retirement. The key to a successful retirement is planning. Failure to plan may lead to a retirement that is not the abundant retirement of which you have dreamed.

Let’s look at some of the key questions to consider when planning for retirement:

1. At what age will you retire? Successful retirement planning requires choosing the best age at which to retire. As an employee, this choice is not always yours. However, if you enjoy your work and have the ability to decide how long you will work, working additional years can dramatically increase your financial resources in retirement.

2. Will you work in retirement? Many people wish to have some “employment” activity during retirement. If you can work and still have time to enjoy your other retirement plans, additional income will greatly enhance your retirement years. Decide early on what you might enjoy during your retirement years. If what you wish to do requires special training, begin preparing for it now.

3. When will you begin taking Social Security? Many people take Social Security as soon as they are eligible. This may not be in their best interests. Unless you are in poor health, you are often better off waiting until at least your Full Retirement Age or beyond to begin taking Social Security.

4. How much are your Pension benefits worth? If you are fortunate enough to get a pension, its value will decrease over time unless it is tied to inflation. I recommend spending no more than 2/3rds of your pension and saving the rest. Each year, increase the amount you spend by the rate of inflation.

5. How much retirement income will you need? For an abundant retirement, you will want to maintain your present lifestyle. Determine expense changes you will want in your retirement years. Combine your present expenses with the retirement expense changes. When this amount is inflation adjusted to the year in which you will retire, you will have a good estimate of your retirement income requirements.

6. How much must you save for your retirement? Once you know your required retirement income plus the value of your Social Security and Pension Benefits, you can calculate the required retirement savings. Begin saving now!

7. Will you move to a less expensive home during retirement? You may have a home that was appropriate for raising children. A less expensive home might better fit your retirement needs. If so, the cost difference between your present home and your retirement home can be added to your retirement savings.

While there are other retirement considerations, answering these seven questions will help you begin the retirement planning process. There are many resources to help you plan for retirement. Chapter 9 of Financial Abundance Guide provides a step by step approach to retirement planning. If you want even more detail, I recommend Bud Hebeler’s book, Getting Started in a Financially Secure Retirement.

If you do not have the time or the interest to do your own retirement planning, find a financial adviser, specializing in retirement planning, to help you. If you fail to plan, you are like planning to fail.

As these turbulent financial times are showing, even with good planning our retirement can be precarious. While you cannot control the markets, you can control whether you actively plan for your financial well being. Start you retirement planning today, even if you are already retired!

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Most employees can no longer depend on a pension for retirement income. “Fixed benefit” plans have been replaced with “fixed contribution” plans, such as the 401(k). Whether you are a company owner, a corporate executive or a company employee, much of your retirement income will likely come from your 401(k) plan.

What can you do to protect this valuable asset, even during our current turbulent times? While you cannot control the stock market or the economy, you can protect the value of your 401(k). The answers below can maximize the value of your 401(k).

1. What does your 401(k) plan cost? Even if you are not a company owner, there are costs to all participants in a 401(k). If your plan is sponsored by a non commissioned brokerage company, such as Fidelity or Vanguard, you can access no-load mutual funds. However, some plan sponsors, offering “low cost” plans to company owners, make most of their fees by offering only mutual funds with a sales “load” (expense). At Google or Yahoo’s financial sections, you can determine if the funds in your 401(k) have sales loads. These include front end loads and/or 12-b1 fees. Also find your fund’s operating expenses. Sales loads and high operating expenses decrease your investment returns. If your plan has sales loads or high operating costs, encourage the plan manager or company owner to consider an alternative plan.

2. Does your 401(k) plan offer diversification? Since a 401(k) is the primary savings of many employees, it should offer well diversified fund choices. While unlimited fund choices can be confusing, a diversified 401(k) plan requires separate stock funds for Large Cap, Mid Cap and Small Cap US stocks. It should also include international stock funds for both developed and emerging markets. Bond funds should include short, medium and long term funds, an inflation protected bond fund as well as stable value and money market fund. If your plan does not have at least one choice from each of these categories, it lacks proper diversification.

3. Does your 401(k) plan offer an employer match? If your employer matches a portion of your 401(k) contributions, always contribute enough to get the full employer matching amount. This match can provide an immediate 100% return on your investment. If the employer match is in company stock, do not invest your own contributions in the stock. When your employer contributions are vested, exchange most of the company stock for funds in your diversified portfolio. Keeping less than 5% of your vested 401(k) plan in company stock helps protect you from a company downturn.

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4. What do you do when you leave your company? Unless there is a good possibility that you will return to your employer, it is usually beneficial to roll- over your 401(k) assets into a self directed IRA. If you have employer stock in your 401(k) that has significantly appreciated, you should consider a tax reduction technique entitled Net Unrealized Appreciation (NUA). Before you request the IRA rollover, request a lump sum distribution of the employer’s stock that is in your 401(k). Properly executed, you will pay income tax only on the stock’s cost (basis). The difference between the stock’s basis and the current market value is taxed at long-term capital gains rates, even if you sell it immediately.

5. Are you managing your 401(k) assets? Many people pick a 401(k) asset allocation when they join a plan and then ignore these assets as they grow. Since a 401(k) will likely be one of your major retirement assets, it deserves your full investment attention. If you provide your own asset management, manage your 401(k) as prudently as you manage your other assets. If you use a financial advisor, require your advisor to include your 401(k) assets when they provide asset allocations and investment advice.

Your 401(k) will likely be a major contributor to your retirement income. To have an abundant retirement, the ideas presented above can help you protect your 401(k) assets. If your 401(k) is treated it as a valuable resource, it will treat you well in your retirement years.

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With inflation exceeding 5%, are you searching for ways to cut expenses and save for retirement? While often overlooked, the Health Savings Account (HSA) can significantly lower your health care costs and provide a tax-free way to save for retirement.

For you health insurance needs, you should consider the combination of a High Deductible Health Plan (HDHP) with an HSA. These health insurance plans are often undersold by insurance agents due to the lower commissions they receive. However, when compared to a traditional health insurance plan, the HDHP/HSA combination will virtually always reduce your health care costs.

The HDHP/HSA combination is often characterized as only being advantageous for the healthy and the wealthy. This assertion is wrong! As long as you contribute the maximum annual amount to your HSA, the HDHP will virtually always save you money on your health care costs, regardless of your health care expenses.

An HDHP/HSA provides three financial advantages over a traditional health insurance policy:

1) If a traditional health care plan, with a $1,500 family deductible, costs $400 per month, an HDHP, with a $4,000 family deductible, will typically cost around 25% less or $300 per month. In this example, the HDHP provides a $1200 per year savings on insurance premiums.

2) When you contribute the family maximum to your HSA, a $5,800 tax deduction is applied to both federal and Colorado income taxes. If family taxable income exceeds $65,100, all incremental income is taxed at 25% for federal income taxes and 4.63% for Colorado state income taxes. The $5,800 maximum HSA deduction provides a combined federal and state income tax savings of $1,718.50.

3) Medical expenses paid from your HSA are made with tax-free dollars. With a traditional health plan, all expenses are paid in after tax dollars. Thus, paying the traditional plan’s $1,500 family deductible will require before tax earnings of $2,132.

Let’s assume that your health care costs exceed $4,000 in 2008. On an after tax basis, the traditional health insurance plan’s deductible will save you $1,868 over the $4,000 HSA deductible. However, HDHP premiums are $1,200 less and the HSA deposit saves you $1,718.50 in federal and state income taxes. Combining both the premium and income tax savings, the HDHP/HSA plan costs $1050.50 less than a traditional health insurance plan, at the maximum HDHP deductible amount of $4,000. HDHP plans also have no co-pays and often pay 100% of all medical expenses after the deductible is met.

If your family is healthy and you only require $1,000 in medical expenses for the year, the annual after tax savings with the HDHP is $3,340. This represents the sum of the HDHP insurance premium savings, the HSA income tax savings and $421 saved by paying the $1,000 in medical expenses with HSA funds that are never taxed.

An HSA is the only savings device that combines the income tax savings of an IRA with the tax free withdrawal of a Roth IRA. Like an IRA, funds deposited into an HSA are completely deductible from your income taxes, even if you don’t itemize. Like a Roth IRA, HSA funds can be withdrawn tax free at any time, to pay for medical expenses.

If your finances will allow, use current income to pay medical expenses and save your HSA funds until retirement. The Employee Benefit Research Institute estimates that a 65 year old will require $164,000 in medical expenses if they live 20 years after retirement. With HSA funds growing tax free, you could potentially have “free” medical care throughout your retirement years.

As long as you fully fund your HSA account and are in at least the 25% federal income tax bracket, you will virtually always come out ahead with the HDHP/HSA. When it comes time to renew your health insurance coverage, consider the HDHP/HSA approach. It will save you money and it can provide an excellent savings vehicle for your retirement years.

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Henry “Bud” Hebeler is author of “Getting Started in a Financially Secure
Retirement” and founder of www.analyzenow.com. He is also wrote the Foreword of Financial Abundance Guide.

For the complete text of bankrate.com article click 20 years of spending saps savings

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Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.

Chapter one of Financial Abundance Guide is entitled “Spend Less Than You Earn.” While this concept appears obvious, many people suffering from personal financial setbacks do not follow this simple precept.

Determine your current financial health

First, prepare an annual budget. For your estimated monthly expenses, track your expenditures for three months. Be sure to include federal, state and FICA taxes. To your estimated monthly expenses add quarterly, semiannual or yearly expenses, such as home and auto insurance, vacations and property taxes. The sum is an estimate of your annual expenses.

Determine your annual “non-retirement income.”

This is your total income less any contributions made to 401(k) plans, IRAs or other retirement accounts. Non-retirement income less annual expenses is the amount of savings that you have available to recession-proof your life.

Ideally, this savings will be at least 10 percent of your non-retirement income. If not, identify some “nice to have” expenses that can be eliminated — like that morning café mocha which can cost over $1,000 per year. In 20 years, with a 5 percent investment return, removing the mocha would provide you with $35,710.

Wipe out any credit card debt

Use savings to pay down one of the most expensive forms of debt available. If you have good credit and equity in your home, consider a home equity line of credit. Use this line to pay off your credit card debt and then pay off your home equity line as quickly as possible.

Get an “emergency fund.”

An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. With an emergency fund in place, you can survive a business downturn, job loss or short- term disability without invading your retirement accounts.

Spend that government rebate wisely

If you receive the $600 per person federal tax rebate, use it to pay off credit card debt, increase your emergency fund or to save for educational or retirement expenses. This income can be your first step in recession proofing your life.

Once your credit card debt is eliminated and your emergency fund is in place, use your savings to buy your first house, pay for your children’s education or to better insure an abundant retirement.

When saving for your first house, consider a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of income plus all of your Roth contributions for a down payment on your first house.

If you are saving for your child’s education, consider funding Coverdell Education Savings Plans and Section 529 College Savings Plans. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.

Most retirement plans provide an immediate tax deduction of the amount contributed and tax free growth of the plan’s funds. If your employer provides matching funds to your retirement plan contribution, always contribute the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee a high rate of return on your investments.

By following these simple, powerful steps you can achieve financial security. If you do not feel that you can take these steps by yourself, find a knowledgeable and trustworthy financial planner to help you with this journey. While lowering your current spending may cause some short term financial discomfort, the payoff of recession-proofing your life is a reduction of fear and stress.

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Did you know that you could earn no income and still contribute up to $4,000 ($5,000 if you are over 50) to an IRA in 2007?

With a “Spousal IRA,” if either spouse has earned income during the year, both spouses may be able to use the income to fund their own IRA. Even if the income earner has a company sponsored retirement plan, the other spouse may fully contribute to an IRA.

The only limitation with a spousal IRA is that the Modified Adjusted Gross Income (MAGI) on the joint tax return must be less than $156,000 to be fully deductible. The IRA is partially deductible if the MAGI is between $156,000 and $166,000.

If you or your spouse have little or no income in 2007, consider contributing to an IRA. As long as your joint income exceeds the total amount contributed to both of your retirement accounts and your MAGI is below the maximums mentioned above, you may fully fund and IRA with no personal income.

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In the November 17th Wall Street Journal, Glenn Ruffenach has an excellent article entitled “The Baby Boomer’s Guide to Social Security.” In the article, he describes a little known plan for two earner baby boom couples to maximize their Social Security benefits. In this entry, I will describe the seldom used tactic and add another twist that Glenn does not cover in his article.

In my scenario, George is age 66 (his full retirement age) and has not yet filed for his Social Security benefits. He is planning on waiting until he is age 70 to file for Social Security, so he will receive “delayed retirement credits” that provide him with 132% of his full Social Security retirement benefit ($2,000 per month) for a total of $2,640 per month.

George’s wife, Barbara, has recently turned 62 and would like to start collecting her Social Security, which would also be $2,000 per month at her full retirement age of 66. Since Barbara is only 62, she will receive 75% of her full retirement benefit or $1,500 per month.

What George found out by reading Glenn Ruffenach’s WSJ article is that he may file for a spousal benefit at age 66 and receive 1/2 of Barbara’s full projected Social Security benefit or $1,000 per month. This allows George and Barbara to jointly receive $2,500 per month, until George turns 70.

When George turns 70, he will apply for Social Security benefits based on his earnings and begin to receive his delayed retirement benefit of $2,640. Thus, when George turns 70, the couple’s Social security benefit will increase from $2,500 per month to $4,140 per month.

The final advantage to this approach occurs if George dies before Barbara, a likely scenario since he is four years older and a male. If this occurs, Barbara may apply for “survivor benefits” and receive George’s full benefit of $2,640 per month instead of her $1,500 per month, for the rest of her life.

Assuming both George and Barbara live until they are age 80, by using this approach, they will receive $59,520 more in Social security benefits than if George had merely filed for his full benefit at age 66.

All of these numbers assume no inflation. On an inflation adjusted basis, the increases in the amount of additional Social Security collected would be even greater.

The above example does not mean that this is the best approach for you. It is only meant to demonstrate that Social Security is a very complex system and the decisions that you make on when and how to receive your benefits can have a major impact on the income that you will receive. Be sure to get expert advice on the vagaries of the system before you make your decision on when and how to take your Social Security benefits.

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Thanks to the present financial crisis that began with the proliferation of “sub-prime” mortgages, housing prices are dropping and mortgages are getting harder to obtain, even for people with a good credit history. If you are wondering if you will ever be able to buy your first home, you may want to consider the benefits of saving for it by using a Roth IRA.

If you are single, with an Adjusted Gross Income (AGI) of under $99,000, or married (filing jointly) with an AGI of under $156,000, you may contribute up to $4,000 of your income to a Roth IRA. In 2008, the maximum Roth IRA contribution will be $5,000. While your contribution does not lower your immediate taxes owed, it can literally open the door to owning your first home.

Let’s assume that you would like to buy a house in the next 5 years. In 2007, you contribute $4,000 to a Roth IRA. In 2008 -2011, you contribute $5,000 each year. At the end of 5 years, assuming an 8% return on your Roth IRA investments, the $24,000 that you have invested will have grown to over $30,000.

With a Roth IRA that has been established for at least five years, you are allowed to withdraw up to $10,000, in income and growth, plus all of your contributions, when the proceeds are used to buy a first home. In the example above, all $30,000 can be withdrawn to purchase a first home, without any income tax or penalties.

This approach will allow you to make a 10% down payment on a $300,000 house. If the remaining $270,000 is financed with a 30 year mortgage with a 6% annual interest rate, your monthly payments would be approximately $1,620 (plus taxes and insurance). While this approach takes patience, it may allow you to become a home owner, building up equity in your future, while your friends are still renting.

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