Financial Symmetry News & Views

Posts Tagged ‘Roth IRA’

HBO has a popular series they air in the fall called “Hard Knocks.” The aim of the program is to uncover the intricacies and nuances that make the training camp of an NFL team so fascinating.  They pull the curtain back and give us a peek at the events that lends a revealing perspective to how the football preseason transpires.  In a similar vein, over the past few posts, we’ve given an insider’s view to our investment review process.  This week we profile the final steps involved in our individual portfolio analysis.

The Dreaded Check Engine Light

Check that Engine!

One of the more standard ways your car will alert you of a problem is by triggering the check engine light.  Usually once illuminated, the check engine light can be decoded by running a diagnostic test on the car.  When we first meet with clients, we’ll often hear the statement, “I want to make sure I’m doing all I can with my investments.”  By running our version of the diagnostic test each quarter, we spot tune-ups and efficiencies that otherwise may be missed.  Our checklist includes:

• Handling required minimum distributions
• Identifying opportunities to fund more tax advantaged accounts (Roth IRA’s, IRA’s or qualified plans)
• Verifying funds will be available for short-term cash needs
• Minimizing transaction fees
• Evaluating if a lower cost investment could fill the role of a current one
• Determining if any accounts can be transferred for cheaper or better investment options
• Considering if any other account openings or transfers would be beneficial (college planning accounts/life insurance/1035 exchanges/annuities)
• Keeping investment allocations in line with your risk capacity and our investment themes

Some of these items occur every year and some every quarter.  Staying on top of each one keeps your portfolio in good working order.

Photo Credit: Robert Couse-Baker

This is the third and final installment of our “Behind the Scenes” series.  It is our hope that this series gave our clients a more transparent look at our business so they can better understand the diligence we employ with each client review.

Have you made your 2009 Roth IRA contribution?

If you have not yet made the maximum contribution, you still have time!  Tax payers have until April 15^th of 2010 to make their Roth contributions for the 2009 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.  For 2009, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2010 contributions, contribution limits for this year have stayed the same.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Qualified Plans	2009	2010
401k, Roth 401k, and 403b plans	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
457 Plans of tax exempt employers	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
SIMPLE IRA or SIMPLE 401k plans	$11,500	$11,500
Catch-up for ages 50 & over	$2,500	$2,500
Limits on annual additions to SEP Plans	$49,000	$49,000
Traditional and Roth IRAs	$5000	$5000
Catch-up for ages 50 & over	$1000	$1000

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Even though 2010 is almost here, you still have time to take advantage of some 2009 tax planning strategies.  Here are some suggestions to consider before ringing in the New Year.

• Should you take losses or pull in capital gains?  It depends on your likely tax bracket…Take a look at your 2008 tax return. The IRS will allow taxpayers to deduct a maximum of $3000 in investment losses against ordinary income.  Many investors had a lot more than $3000 in realized losses in 2008 and, as a result, have a carry forward of the unused losses to 2009.  The opportunity now is that the IRS allows an unlimited amount of realized investment gains to be offset by realized investment losses.  So if you held on to an investment that has recovered much of its value this year, now may be a good time to sell.  If you don’t have any losses from 2008 to use consider selling something at a loss now.  Like we said above, the IRS allows $3000 of realized investment losses to be used as a deduction against ordinary income.  If you are in a higher tax bracket, that can be a valuable tax savings.

• If you are in the 10 and 15 percent tax brackets you can realize capital gains on investments held for more than a year at a zero percent tax rate in 2009.

• Watch out for the social security bubble – Up to 85% of your benefits could be subject to income taxation depending on other sources of income.

• Taxpayers normally subject to required minimum distributions from tax deferred accounts have been granted a waiver for 2009. It may make sense, however, to take some amount from those accounts depending on tax bracket.  Also, remember that you have sixty days from the distribution date to rollover into an IRA if you change your mind.

• Look at making a Roth conversion.  Because of the tax-free nature of the withdrawals, you need to consider your current tax bracket vs. your future tax bracket.

• Consider donating appreciated stock rather than writing a check.

• Make your property tax and estimated state income tax payments by December 31 if you want the write off for federal tax purposes.  Make sure that you consider the implications for alternative minimum tax.

• Weigh 2009 and 2010 together.  For example, you might want to wait until January to make property tax and state estimated tax payments if you think you will be in a higher tax bracket in 2010.

• If you are in the position to do so, you can gift to as many individuals as you wish up to $13,000 as the allowed gift tax exclusion.  If you are married, your spouse can gift $13,000 to those same individuals.

• The Hope Education Credit was renamed the “American Opportunity Tax Credit” for 2009.  This maximum credit for the first four years of postsecondary education is now increased to $2500.  This includes course materials costs in addition to tuition and fees.

Article published on FiLife.com by Financial Symmetry’s Allison Berger, CFP ®.

Finding the motivation to save can be just as difficult as motivating yourself to diet and exercise. In both cases you know the outcome will be worthwhile — financial security and better health. However, taking the steps to get there is easier said than done.

If you have ever watched the show “The Biggest Loser,” you have probably heard the trainers say that being fit is not about dieting, but about making lifestyle changes that you can stick with over time. As the contestants participate in the challenge, their health gradually improves and their motivation to continue a healthy lifestyle typically increases. The hardest part is usually getting started.

The same is true with saving. While difficult at first, adopting a scheduled savings strategy and making budgeting part of your routine will increase your odds of achieving your financial goals. Identifying those goals is the first step to finding that motivation, so spend some time thinking about what you want your money to do for you. Maybe you are saving for a family vacation, your children’s education, retirement, or all of the above. Make a list prioritizing each goal and put time frames on them.

Next, work on identifying those triggers that keep you from saving money. Just as having chips and cookies in the house can derail your healthy lifestyle, so can mail order catalogs on your coffee table or even a clear view of your neighbor’s new BMW. Toss those catalogues in the recycle bin, put a limit on your Amazon or eBay habit, and start planning a savings strategy.

One of the best ways to stick to your financially fit goals is to make savings automatic. Hopefully you are already deferring money from every paycheck to your 401k. Think about increasing your deferral to put more toward your retirement goal. Then find other savings you can make automatic. Maybe you can set up a monthly transfer into your savings account, Roth IRA, or your child’s 529 plan. This strategy takes some of the work out of saving and automatically curbs spending, as your checking account appears less flush each month.

Lastly, remember that you are not alone. You probably have friends and neighbors who are also trying to stick to a financially fit lifestyle. Work together on finding low cost activities to do, and exchange tips and tricks along the way. You may also want to consider using a professional. A financial planner can help you develop a strategy specific to your needs in the same way a personal trainer can recommend the best exercises for your health and fitness goals. You can seek out a fee-only financial planner at napfa.org.

Article published on FiLife.com by Financial Symmetry’s Allison Berger.

In the current economic environment employers are evaluating all of their cost cutting options. In many cases this may lead to suspending or reducing their 401k match.

For employees of such companies this should prompt an evaluation of their current savings strategies. One of the golden rules you will hear in financial planning is that you should, at the very minimum, contribute enough to your 401k to receive the employer match because this is “free money.”  However, when the matching program is suspended, this no longer holds true.

Some questions you should ask yourself when deciding if you should continue contributing to your 401k plan are:

• How would I use the additional money in every paycheck?

• What other savings strategies should I utilize?

• What would be the tax implications of discontinuing contributions?

This first question is key because part of the attraction of 401k deferrals is that they make retirement saving automatic, eliminating the opportunity to spend those funds rather than save them. This has become increasingly important in modern society with the reduced availability of traditional pension plans to cover our retirement needs.  Without the automatic deferrals from your pay check, it will be important to establish other savings strategies to continue funding your retirement goals.

This leads us into questions 2 and 3, which are intricately related. The appropriate retirement savings strategies will rely heavily on your income level and tax bracket. You should evaluate what your adjusted gross income would be with and without your current 401k contribution. Before eliminating your deferral altogether you will want to make sure that this will not push you into a higher tax bracket, since traditional 401k contributions are made pre-tax. If you are in a low tax bracket then you may want to consider contributions to a Roth IRA instead of your 401k since withdrawals from that account will be tax free in retirement. As a result of lay offs and pay cuts over the past year, some individuals may now be within the income limitations to make Roth contributions when they were not in the past. This option should be analyzed as well.

For most employees a combination of some level of 401k and IRA (Traditional or Roth) contributions make sense. Seek the guidance of your financial advisor to help you evaluate your options when faced with a 401k match suspension.

This issue of our In the Know will discuss the contribution limits for Qualified Retirement Plans, Traditional and Roth IRAs as part of your 2009 savings plan review.

Make your 2008 Roth IRA contribution:

If you have not yet made the maximum contribution, you still have time! Tax payers have until April 15th of 2009 to make their Roth contributions for the 2008 tax year. If you are within the income limitations to make contributions, a Roth IRA is an excellent investment as investment growth is tax deferred and withdrawals in retirement can be tax free.

Looking forward for 2009 contributions, there are a few increased contribution limits for this year and a few that have stayed the same. While the limits for the Roth and Traditional IRAs have not increased, the limits for the majority of employer sponsored plans such as 401ks and 403bs, have.

A very good practice is to contribute enough of your salary to receive at least the employer match. Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Qualified Plans	2008	2009
401k, Roth 401k, and 403b plans	$15,500	$16,500
- Catch-up for ages 50 & over	$5,000	$5,500
457 Plans of tax exempt employers	$15,500	$16,500
- Catch-up for ages 50 & over	$5,000	$5,500
SIMPLE IRA or SIMPLE 401k plans	$10,500	$11,500
- Catch-up for ages 50 & over	$2,500	$2,500
Limits on annual additions to SEP Plans	$46,000	$49,000
Traditional and Roth IRAs	$5000	$5000
- Catch-up for ages 50 & over	$1000	$1000

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts. It also reviews your income tax and estate picture, which may provide opportunities for tax savings.

If you are interested in this service, please contact us.