Quick blog tonight to remind you that April 15 is your last day to fund a traditional IRA or a Roth IRA for 2009. Even if you file for a tax extension, April 15 is still your deadline. Now, if you have a small business retirement plan or your employer has a small business retirement plan, the plan may be able to be funded as late as the business tax return is filed, including extensions. However, your traditional and Roth IRA funds are due in April. So if you need your last chance for a 2009 deduction, consider a traditional IRA if you are eligible. (Check earlier blogs to see if you can.)
Be prosperous!
Peggy
Peggy Doviak
Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts
Monday, March 8, 2010
Monday, February 15, 2010
401(k) Plans
Many companies choose to offer a 401(k) plan to help their employees save for retirement. A 401(k) plan isn't actually a plan at all, it's an addition to another plan! A 401(k)cash or deferred alternative is added to a profit sharing plan or a stock bonus plan, so let's start there.
A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.
Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.
Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.
If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.
Be Prosperous!
Peggy
A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.
Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.
Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.
If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.
Be Prosperous!
Peggy
Thursday, January 28, 2010
Tools and Taxes
Greetings from the Arctic! As I sit working, ice is accumulating on all the trees, the grass, the now, finally, the roads. How happy am I that technology lets me work wherever I am?
No, I'm not talking about hammers and screwdrivers today! I'm talking about the tax impact of different kinds of accounts you can use to save for retirement.
Basically, the tax treatment of your investment accounts take one of three forms, and they each have advantages and disadvantages.
1. You put the money in the account in pre-tax dollars. This means that you don't pay any tax on the money until you withdraw it during retirement. The idea is that you have more money to grow for all those years, and that helps your compound rate of return. (We talked about that a couple of days ago.) Then, once you are in retirement, you are supposed to be in a lower tax bracket, so when you take the withdrawal, you pay fewer taxes than if you had paid taxes back when you were working. This is the most common way to save for retirement. The only thing to ask yourself is whether or not you believe you are in a higher tax bracket today than where you will be in retirement. And this assumes that you do, in fact, retire. I'm beginning to think that for some people, retirement is actually no longer a major goal. Of course, health issues can interfere, but I really believe this demographic is changing quickly.
2. You put the money in a Roth IRA in after-tax dollars. If you wait until you are 59 1/2 and the account has been open for five years, when you take the distributions, you pay no tax. Withdrawals are totally tax free. I love Roth IRAs and will be devoting an entire blog to them in the near future.
3. You put the money in a normal, taxable account in after-tax dollars. Then, rather than paying income tax, you pay capital gains on the realized gains of each investment. A realized gain is a position you actually sold for a profit, not a position that you still hold. Also, if the investment pays any dividends, these are also taxable. Capital gains tax takes two forms: short term and long term. Short term capital gains are for those investments you have held less than a year. The short term capital gain rate is your ordinary income tax bracket. Long term capital gains are for those investments you have held longer than a year. Capital gains tax rates have been very low and are expected to increase, probably in 2011, but only to 20% on most investment portfolios. The advantage to this kind of account is the access to the funds and the lower tax bracket than ordinary income taxes.
What to do? I can't tell you. But I would suggest looking at your financial situation and deciding whether or not you would be wise to diversify the tax treatment of your invested money.
Be prosperous!
Peggy
No, I'm not talking about hammers and screwdrivers today! I'm talking about the tax impact of different kinds of accounts you can use to save for retirement.
Basically, the tax treatment of your investment accounts take one of three forms, and they each have advantages and disadvantages.
1. You put the money in the account in pre-tax dollars. This means that you don't pay any tax on the money until you withdraw it during retirement. The idea is that you have more money to grow for all those years, and that helps your compound rate of return. (We talked about that a couple of days ago.) Then, once you are in retirement, you are supposed to be in a lower tax bracket, so when you take the withdrawal, you pay fewer taxes than if you had paid taxes back when you were working. This is the most common way to save for retirement. The only thing to ask yourself is whether or not you believe you are in a higher tax bracket today than where you will be in retirement. And this assumes that you do, in fact, retire. I'm beginning to think that for some people, retirement is actually no longer a major goal. Of course, health issues can interfere, but I really believe this demographic is changing quickly.
2. You put the money in a Roth IRA in after-tax dollars. If you wait until you are 59 1/2 and the account has been open for five years, when you take the distributions, you pay no tax. Withdrawals are totally tax free. I love Roth IRAs and will be devoting an entire blog to them in the near future.
3. You put the money in a normal, taxable account in after-tax dollars. Then, rather than paying income tax, you pay capital gains on the realized gains of each investment. A realized gain is a position you actually sold for a profit, not a position that you still hold. Also, if the investment pays any dividends, these are also taxable. Capital gains tax takes two forms: short term and long term. Short term capital gains are for those investments you have held less than a year. The short term capital gain rate is your ordinary income tax bracket. Long term capital gains are for those investments you have held longer than a year. Capital gains tax rates have been very low and are expected to increase, probably in 2011, but only to 20% on most investment portfolios. The advantage to this kind of account is the access to the funds and the lower tax bracket than ordinary income taxes.
What to do? I can't tell you. But I would suggest looking at your financial situation and deciding whether or not you would be wise to diversify the tax treatment of your invested money.
Be prosperous!
Peggy
Monday, January 25, 2010
Retirement Spending
There is a common rule of thumb that suggests you will need about 80% of your current expenses during retirement. Although a convenient assumption, if you think about it for a minute, it likely isn't true. Some people dream of a retirement with cruise ships, warm water, and fruity drinks. Others, look forward to spending a week or two at the lake. Some want vacation property; others just dream of Sunday dinners surrounded by children and grandkids.
Your vision for your retirement will determine how much money you will need.
Now, there are some trends about retirement income. Low income individuals need nearly as much in retirement as they make while working because their monthly expenses consist of paying all the necessary bills with little money left. If someone rents, not owns, and has little "spending" money, they will have virtually no difference between working and retirement.
Middle class families often see a decline in expenses, as houses are paid off, working expenses minimize, and retirement plans are modest.
However, upper-middle to upper class families may actually see an increase in retirement expenses, as the desire for living the good life leads to second mortgages and expenses.
Just be careful not to accept immediately a vision of your retirement provided by someone who doesn't know you!
Be prosperous!
Peggy
Your vision for your retirement will determine how much money you will need.
Now, there are some trends about retirement income. Low income individuals need nearly as much in retirement as they make while working because their monthly expenses consist of paying all the necessary bills with little money left. If someone rents, not owns, and has little "spending" money, they will have virtually no difference between working and retirement.
Middle class families often see a decline in expenses, as houses are paid off, working expenses minimize, and retirement plans are modest.
However, upper-middle to upper class families may actually see an increase in retirement expenses, as the desire for living the good life leads to second mortgages and expenses.
Just be careful not to accept immediately a vision of your retirement provided by someone who doesn't know you!
Be prosperous!
Peggy
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