Archive for January, 2016

What President Obama’s New Retirement Proposal Entails

Thursday, January 28th, 2016

new retirement - wide

Changes that President Obama will propose to employer-sponsored retirement plans could help 30 million American workers have access to retirement savings. In the announcement on Monday, president Obama proposed, in his new 2017 budget, rules that would make it easier for small businesses to join together to form 401(k) retirement plans for their workers, even if the businesses are in different industries.

Small businesses can already band together to form a retirement plan, though officials said that current law discourages them from doing so if the businesses are not closely related. They noted that some independent auto dealerships have united to create retirement plans for their workers, allowing the businesses to share costs.

The president proposed specific legal changes to promote the broader use of the program, often called an open multiple employer plan. Officials said the changes would clarify “decades of precedent, both case law and guidance,” that currently stands in the way of such plans.

Obama’s plan consists of of a number of legislative proposals, which he’ll outline in the 2017 budget he’ll submit to Congress next month. They include:

  • Offering tax credits to small businesses that automatically enroll employees in a new 401(k)-style retirement plan — or requiring them to offer payroll deductions to an Individual Retirement Account if they don’t offer a company plan.
  • Requiring companies with existing plans to offer them to long-term, part-time workers who work 500 hours a year for three years; and
  • Making it easier for companies to pool their retirement plans to bring down expenses through multiple employer plans.

In addition to the 401(k) proposal, President Obama’s budget will include other modest retirement initiatives, including one that would require businesses with more than 10 employees to automatically enroll their workers in an IRA program, if the businesses do not offer a separate retirement savings program.

That proposal has been part of the president’s budget in the past, but officials said they hoped Republicans would support it this time. The budget will also seek funding for pilot programs that would provide new ways for people who change jobs to shift their retirement savings into programs offered by their new employers.

It’s Tax Season: Avoiding Big Taxes on Your Investments

Monday, January 25th, 2016

tax season

Since tax season is in full swing, now is the appropriate time to do a mini series of tax-related articles, right? That’s what we thought, so over the next few weeks, that’s what we’ll be doing. To kick things off, let’s go over taxes on your investments. Taxes can eat into your investment performance in ways that you can’t imagine, and definitely don’t anticipate. Thankfully, there are ways to improve your returns while keeping Uncle Sam at bay.

Developing a “tax-efficient” investment strategy should be on the top of your money resolutions this year if you don’t already have one in place. It’s relatively easy to do once you identify some problem spots.

First off, where you hold your investments makes a big difference in how your investments will be taxed. For long-term savers, 401(k)s, 403(b)s, Roths and 529 college savings plans all allow you to compound your money tax deferred.

While you’ll pay taxes on contributions to Roth 401(k)s and IRAs, you can take withdrawals tax free, but they are subject to certain conditions. If you hold money in the account at least five years and you’re 59 1/2 or older, there’s no tax on what you take out.

Here’s where it gets troublesome. Anything held outside of a qualified retirement account can trigger capital gains, dividend, or ordinary income taxes. That’s what I mean by “tax efficiency.” If you can keep money in a retirement or 529 account, you don’t have to worry about funds you plan to leave alone for a while.

The act of keeping money outside of tax-deferred accounts can cost you plenty, and there are an array of taxes that may apply:

  • Ordinary dividend and net short-term capital gain distributions—on sales of securities held 12 months or less—are taxed at the investor’s ordinary income tax rate, currently a maximum of 39.6%.
  • Long-term capital gain distributions—on sales of securities held more than one year—are taxable as long-term capital gains.
  • The maximum tax rate on “qualified dividend” income and long-term capital gain distributions for most investors is 15%, but increases to 20% for high-income individuals.
  • In addition, high-income taxpayers are subject to the 3.8% health care tax on “net investment income.”

For those who also invest in taxable accounts— about 47% of bond and stock mutual fund assets are held in such accounts— should consider their asset location strategy as well as their asset allocation strategy. This approach should enhance tax efficiency (which measures the difference between pretax and after-tax returns) and potentially improve after-tax returns.

What can you do to save on taxes outside of deferred accounts? Keep in mind that vehicles paying dividends or long-term capital gains are taxed at a lower rate than investment returns taxed at ordinary income.

If buying mutual, or exchange-traded funds, also consider the funds’ “tax efficiency ratio”. Generally the higher the ratio, the lower your tax bill from owning that fund. As a rule, passive index funds, which buy and hold a basket of securities, will have a higher tax-efficiency ratio than an actively managed fund.

Make sure to consult with a registered investment advisor or a certified financial planner before making big changes to your tax strategy, or if you have questions on what to do with your portfolio to lower taxes.

Know Your Options: Creating a Comfortable Retirement

Thursday, January 21st, 2016

Comfortable retirement

We love seeing retirement being addressed on big networks, it’s definitely not something that’s on everyone’s immediate to-do list, so our favorite topic being highlighted is a nice change of pace.

1. Retirement accounts

Company option: If your company offers a specific retirement plan or 401(k), that’s a good place to start saving for down the road.

MyRA program: If a company retirement plan is not offered, one option is a MyRA (a program that we’ve talked about before), or My Retirement Account, an account developed by the U.S. Department of the Treasury. It’s a Roth IRA, which only invests in treasury bonds, and there are no fees, no minimum balance and no contribution requirements.

2. Know what should be saved

Save what you need for the next 3 years: Any money you need for things like paying for college, a down payment on a house or living expenses that isn’t covered by Social Security should not be in the stock market because it’s too risky and a downturn in the market could wipe out money you cannot afford to lose.

If safe money is in stock markets, sell: Pull your safe money out of the stock market and put it in things like savings accounts, money market funds, CDs and short-term government bond funds. Move that money to safety even if it means taking a small loss because keeping it in the market could mean much bigger losses.

3. Calculate asset allocation

Investment mix: Determine how your money is split between stocks, fixed income (or bonds) and cash.

Percentage should go down as you age: You want to reduce the percentage of your money tied up in stocks as you age so that it lessens as you get closer to retirement. If you subtract your age from 100, that’s generally the percentage you want in stocks, with the rest in bonds and cash.

Rebalance once a year:
Take the time to balance out your portfolio once a year and get your asset allocation to where it should be.

A Beginner’s Guide to Investing in Gold

Monday, January 18th, 2016

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Only 18 days into 2016, and we can already say that it’s been a rocky year. The world is going through rough times in many ways; the second episode of the Chinese stock market crash last week has spooked stock investors across the globe. Bond yield spreads are rising, adding to investors’ fears of bigger defaults in the bond markets. And at the same time, leaving cash idle in the bank isn’t earning savers anything. With interest rates under one percent and inflation close to two percent, investors who are stashing cash stand to lose all of its worth in real terms.

In times like these, gold bullion might be looking like the next best alternative for your investment portfolio.

Bullion investing is basically gaining financial exposure to precious metals—primarily, gold, silver, platinum, and palladium. Of these, gold offers the most liquidity.

1. Physical Gold

The simplest and most direct form of gold investing is in buying gold jewelry, gold bars, with an IRA, or gold coins—jewelry from a jewelry store, bars from a bank or a dealer, through your self-directed IRA administrator, or coins from a dealer.

Coins are the most commonly held form of physical gold, after, of course, jewelry. The best options are the American Eagle, American Buffalo, and Canadian Gold Maple Leaf coins.

When looking for a coin dealer, always seek one who offers the best bargain value. Albeit small, dealers charge premiums on coins above the spot gold price, meaning that you’ll be buying these coins at a price higher than the current market price of gold. In order for you to make money on your investment, the spot price of gold must increase enough to cover the premium you paid. This is why you should look for a dealer who is selling coins for the lowest premium.

2. Gold ETFs

If you don’t want to buy physical gold, you may gain indirect exposure to gold through exchange-traded funds (ETFs).

ETFs indirectly track the price of a basket of assets. Gold ETFs, in particular, come in three forms: 1) those backed by physical gold, meaning they track gold’s spot price; 2) those backed by gold miners’ stocks, such that they track the stock prices of a handful of prominent gold mining companies; and 3) those backed by gold futures, meaning they track the prices of derivative contracts that speculate the future price of gold.

3. Gold Stocks

The third possible way to add gold to your investment portfolio is to buy gold stocks. By “gold stocks,” I mean companies that are involved in the mining, exploration, development, and production of gold.

The risk involved here is that like any other listed company, gold stocks are exposed to stock market fluctuations. The same rules of investment will apply here that apply to any stock on the stock market, in that you’ll have to weigh the financials and fundamentals before jumping into any of these stocks.

4. Gold Derivatives

Finally, gold options and gold futures contracts are an indirect way to invest in gold—but a very risky one. Experts say that gold derivatives should be the last investment resort for any novice investor.

Unlike the spot gold market, where the prices are listed as they are, the futures market trades contracts on future price speculations. Because of the risks involved and the level of sophistication required, investors should strike this option off their radar if they’re not a seasoned trader.

To wrap it all up, gold derivatives, gold stocks, and gold ETFs that are not physically backed by gold are some of the riskier investments. On the other end of the risk spectrum, there’s physical gold and gold-backed ETFs, which are relatively simpler, safer investments.

IRA Q&A: is it Possible to Contribute to an IRA Without a Job?

Thursday, January 14th, 2016

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Here’s a question that popped into my head just the other day: Can you put money in an IRA or a Roth IRA if you don’t have wage income?

And the answer I found is that Individual Retirement Accounts (IRAs) were introduced in the mid-70s to help employees save for retirement and reduce their taxable income. So it stands to reason that to make a contribution—and get the tax benefit—you’d have to have income from a job. And, in fact, contributions to both traditional and Roth IRAs can only be made from what the IRS determines to be “earned income.” However, wages aren’t the only form of earned income. So let’s start by looking at the definition.

What’s considered earned income

You don’t have to work for someone else to have taxable earned income. You can also work for yourself. Compensation from either type of employment would be considered earned income. But the complete definition is a bit broader. According to the IRS, taxable earned income includes:

  • Wages, salaries and tips
  • Union strike benefits
  • Long-term disability benefits received prior to minimum retirement age
  • Net earnings from self-employment

In terms of an IRA contribution, the amount of your earned income is also important. The maximum contribution you can make for 2011 is $5,000 ($6,000 if you’re over 50). But if your taxable income is less than the maximum contribution, you can only contribute up to the actual dollar amount of your earned income for the year. In other words, you can’t contribute more to your IRA than you earn.

What about unearned income?

Because there are other ways to make money, it’s probably equally important to understand what’s not considered to be earned income. Things such as interest and dividends from investments, pensions, Social Security benefits, unemployment benefits, and child support—even though they may factor significantly in your monthly bottom line—aren’t considered earned income for tax and IRA contribution purposes.

The Spousal IRA exception

Fortunately for married couples, there is one way to make a contribution to an IRA if you don’t have wages—a Spousal IRA. This is a tax-advantaged retirement account designed specifically to allow a working spouse to make contributions on behalf of a nonworking spouse. Under current laws, if you’re married filing jointly, you can contribute the maximum into an IRA for each spouse—even if one of you has no earned income—as long as the working spouse has income equal to both contributions.

So let’s say both you and your spouse are over 50 and want to contribute the maximum of $6,000 to each of your IRAs. Whichever one of you is working would have to have earned income of $12,000 or more to cover both contributions.

Another good thing about the Spousal IRA is that, should the non-working spouse go back to work, he or she can contribute to the same IRA. That’s because, once opened, a Spousal IRA is an Individual Retirement Account like any other.

Making retirement top priority no matter what

Even if you don’t qualify for the tax advantages of an IRA or other type of retirement account, if you have income from other sources besides wages, I advise you to save for retirement—and save consistently. Open an investment account or other type of savings account, earmark it for retirement and direct a percentage of your income to that account each month. Ideally, you could set up an automatic transfer from your online checking account into your savings account to make it easier on yourself. Then, should your earnings situation change and you find you’re able to contribute to an IRA or participate in an employer-sponsored plan, you’ll be ahead of the game.