Tax Planning

Retirement Planning in 2014

Planning for retirement is one of the most important aspects in the financial planning process. However, only 64% of us actually takes the time to plan and save for retirement. There’s no doubt that planning for retirement can be a daunting endeavor, however not having enough resources to live comfortably during retirement is a far worse alternative. Many of us postpone retirement planning due to the perception that we will have plenty of time in the future. This is not usually the case as many retirees wish they started to save for their retirement sooner. As we start or adjust our retirement plans in 2014, it’s important to remember that we control our ability to plan and save for retirement.

Despite the fact that we can control some aspects of our retirement, there are a few that we can’t. This includes elements such as economic growth, inflation and retirement plan contribution laws. These limits can change year to year as they are dictated by Congress. In 2014 ensure that you consider the following limits in your retirement plan and adjust if necessary.

Contribution Retirement Plans Limits in 2014

Contribution retirement plans are employer sponsored investment accounts. These accounts are funded through automatic paycheck deductions. In these plans a employer sets a matching contribution policy in which they will invest a percentage of an employee's income as a retirement plan investment.

If your employer offers a contribution retirement plan, it is in your best interest to participate. Not only do these plan offer you a quick and easy way to build your portfolio, it also provides great tax advantages. Your personal retirement account contribution is deducted from your paycheck before taxes are calculated. This helps you reduce your annual tax bill.

In order to limit the amount of tax that is deductible from these retirement plans, Congress caps the amount in which can be contributed to these accounts on an annual basis. In 2014 you will be able to contribute up to $17,500 in your 401(k), 403(b) and most 457 plans. In addition if you are 50 years or older you qualify for a retirement “catch up” contribution of $5,500. This will set your total contribution limit at $23,000 a year.

Individual Retirement Plans Limits in 2014

Individual Retirement Plans or IRAs, are tax advantaged investment accounts. These common retirement plans are usually managed by the individual and can be opened at most financial and brokerage firms. While IRAs have a few advantages over contributions plans, such as investment flexibility, they do not include an employer contribution.

Individuals can contribute up to $5,500 to their IRA in 2014 and if over the age of 50 they qualify for the additional $1,000 “catch up” contribution. While the contribution limits to IRAs are limited, maxing out your contribution to your IRA is better than not having any retirement savings at all.

In addition to the limits for IRA contributions, the tax advantages are also capped by your Adjusted Gross Income or AGI. In 2014 the traditional IRA tax deduction is phased out for single taxpayers with a retirement plan at work when their incomes are between $60,000 and $70,000. However this limit is raised for married couples when their combined incomes are between $96,000 and $116,000.

If you do not have a retirement plan for 2014, it’s never too late to start. Many put off saving for retirement for a variety of reasons. Retirement is enviable and postponing preparing for it makes it more difficult.

Financial Planning for Newlyweds

The joining of two people in marriage is quite a significant event, not only for the families of the newlyweds, but for their finances as well. While bringing together two incomes is a pretty straight forward endeavor, bringing together various expenses, assets, liabilities and the possible emotion connection to them can be tricky.

In my previous post “You’re Engage, Create a Financial Plan”, I discussed some of the advantages of having a financial plan before you’re actually married. In short, creating a financial plan can help you and your future spouse explore your life’s goals and objectives before tying the knot. This will help significantly reduce the possibility of disagreements when managing your finances in the future.

If you are a newlywed or recently became engaged, start the financial planning process by defining your combined goals and objectives. Once complete, the following steps will help you merge your finances and create a joint financial plan.

Data Collection and Analysis

During this memorable time in your lives, it’s important to locate all of the data that will impact your financial well being. This information will be used to construct your financial planning statements and determine the strengths and weaknesses that exist in your current financial situation.

The first step is to gather your qualitative financial planning data. This information will help you explore and document your risk tolerance, past experiences with money, feeling towards different investment products and your retirement expectations. This data is mostly used in the consideration of shared values and the emotional connection to various financial decisions.

In contrast, quantitative financial planning data is more numerical in nature. Gathering this data can be accomplished by listing the title and value of your cash accounts, insurance policies, estate planning documentation, and historical tax returns. This data will be used to develop forecasts and determine the affordability of your goals and objectives.

Once you have gathered and listed all of your financial planning data, it’s time to determine which accounts and policies should be merged, eliminated or simply left alone.

Merging Accounts and Financials

The decision to merge accounts and other financial planning tools, can be difficult. This is not only due to the volume of forms that will have to be filled out, but also the fear of losing control over a very important aspect of your personal life.

To begin merging accounts, it’s important to understand the advantages and disadvantages of each one. This will help determine if there could be any savings or added complexity from merging accounts (such as consolidating insurance policies or changing beneficiaries).

Once all of your options have been laid on the table, it’s time to merge the accounts that have the most advantages. When merging accounts, remember you don’t have to do it all at once. As long as there is open and honest communicate accompanied by a clear action plan, you can merge your financial accounts when it’s best for you and your schedule.

In today’s fast moving and advanced world, marriage is more than a romantic commitment to the person you love, it’s a business arrangement as well. Newlyweds should take the time to create a financial plan. This will ensure that the business side of you relationship is healthy and moving in the right direction.

Financial Planning Assumptions - Part 2

As mentioned in Financial Planning Assumptions - Part 1, in-order to create a financial plan you will need to rely on a variety of assumptions. These assumptions will be required to forecast and estimate your future financial situation. In addition to estimating investment rates of return and inflation, you will also need to estimate the following assumptions for inclusion in your comprehensive financial plan.

Assuming Life Expectancy

A financial plan should include a lifelong cash flow forecast. This will ensure that you understand about how much money you will need though all phases of your life. The best case scenario is that you will have enough money to live comfortably in your golden years. To ensure that you do not run out of money during retirement, you will have to use an estimate of your life expectancy in your cash flow analysis.

Two of the most common methods of estimating life expectancy includes using an actuarial life table and planning to 100 years old. Using an actuarial table provides an estimated life span based on year of birth. The U.S. Social Security Administration provides actuarial tables on their website.

Despite the mathematical savvy of the actuarial table, I prefer to estimate all life spans to 100 years of age. This method reduces the risk of running out of money in retirement.

Retirement Planning Assumptions

Looking into the future, it is difficult to determine what your life and career will look like at certain date or age. Due to this difficulty, you will need to make a few assumptions concerning your eventual retirement.

The assumptions that you will need to place in your retirement plan include: date of retirement, income needs during retirement, amount of monthly Social Security benefit and the value of your investment accounts upon retirement.

Your anticipated date of retirement is highly contingent on your cash flow needs and preferred lifestyle. In the absence of any additional data, estimating a retirement age of 62 - 67 is appropriate. Your income needs during retirement can be estimated by creating a budget or using a few common rules of thumb.

Many of us will rely on Social Security benefits for a portion of our retirement income. This amount will have to be assumed due to the probability that Congress will lower these benefits in the future. To estimate these benefits at retirement I like to use the models on the Social Security Administration's website. Finally, you should take a look at your investment plan and forecast the value of your portfolio at your retirement age.

Guessing Future Tax Rates

The last major assumption you will have to incorporate into your financial plan concerns tax rates. Tax rates are as difficult to estimate as Social Security benefits due to the politics that influence them. This is why I rather refer to tax rate forecasting as "guessing".

There are three main tax rates that influences the outcome of your financial plan. These rates includes taxes on income (salary), capital gains (investments) and estates (property transfers).

Due to the uncertainty of these rates, many financial analysts keep them constant (place current rates into the financial plan) when estimating future cash flow. However for a robust comprehensive financial plan, I recommend performing a "what-if" analysis to see how a change in rates effects your long-term financial success.

When developing a financial plan you will be required to include a few assumptions into your analysis. These assumptions can have a significant impact the outcome of your plan, thus your best effort should go into their accuracy.

A Few Ways To Increase Tax Returns

About this time every year most of us get a little excited about getting a tax return check from the U.S. Treasury. While it's best to change your deductions to ensure that you are not paying more taxes than you should every paycheck, it's nice to receive a few hundred dollars after the holiday season.

While it is tempting to spend your tax return on the newest gadget, I feel compelled to note that paying down some of your debt or investing it can feel just as rewarding.

While a few hundred dollars might not make a substantial dent in your debt or make a huge difference in terms of your invested capital, the act alone can help develop good financial habits. Making smart financial decisions, such as these, consistently over time will eventually make a huge impact in your finances.

Consult with a Tax Professional

As many of us already know, taxes can be complicated. The complexity of our taxes usually increase as we grow older and acquire more assets (investments, businesses, real estate, etc.). In order to maximize your tax deductions its always a good idea to consult with an expert.

Robust online tax services usually provides all of the tax information than most of us need to maximize our deductions. These services, while more expensive than filing your taxes yourself, make the process of increasing your tax return easy and intuitive. In addition, for people with complex tax needs, Certified Public Accounts can help you increase your tax return.

Contribute to Traditional IRA

One of the best ways to increase your tax return is to maximize your contribution to an Traditional IRA. These Individual Retirement Accounts are a tax efficient way to save (and invest) for retirement. In 2012 the maximum contribution to an IRA is $5,000, however it is set for $5,500 in the 2013 tax year. However keep in mind that, depending on your situation (i.e. have an employer spnsored plan), you might not be able to deduct all or any of your contribution.

Donate Unused Stuff to Charity

Many of us have things laying around that we no longer use. In example, I have a bunch of sporting equipment that I haven’t used in years. Instead of letting this stuff just lay around and collect dust, I donate everything that I haven't used in a while. The IRS allows you to deduct your charitable donations. This allows you to keep your house clutter free and can increase your tax return.

Sell Your Loser Stocks

All of us that have a personal portfolio have a few losing stocks. This is an unfortunate and difficult to avoid situation. Regardless many of us look at losing stocks as an opportunity to make our money back. A losing stock can take a long time to turn around (if it ever does), thus its sometimes a wise decision just to sell it and take a loss.

The losses that you take in your portfolio can be used to offset your winning trades and reduce your capital gains liability. In addition, investment losses can increase your tax return by reducing your taxable income. So take a look at your losing stocks, you might be able to gain from them this tax season.

The easiest way to increase your tax return is to listen to the advice of experts. There are many deductions that you can take to increase the amount that you get back from the U.S. Treasury. I suggest taking as many as you can.

The Rules and Limits of Traditional IRAs

When looking at all of the different investment and retirement planning tools available, its easy to become overwhelmed. However, the Individual Retirement Account (IRA) is one of the most popular and widely use retirement accounts.

The rules that govern the application and management of IRAs change slightly from year to year. This is due to the changes Congress makes in tax laws (the following figures are for 2012).

Traditional IRA Eligibility Rules

To be eligible to invest in an IRA, you only need to have earned income for the year in the amount of the contribution. This includes both self-employment and part-time income as well. As with many tax advantaged accounts, there are restrictions to investing in an IRA which include the participation in a tax-qualified retirement plan and if your income is above certain thresholds.

If you are eligible or participate in a company sponsored retirement plan, the tax advantages of Traditional IRAs are limited. The tax deductions of investments in Traditional IRAs are phased out for single filers that make adjusted gross income (AGI) between $58,000 and $68,000. In addition, married couple’s IRA tax deductions are phased out between AGI of $92,000 and $112,000.

Traditional IRA Contribution Limits

Depending on your contribution eligibility, individuals will be able to contribute up to $5,000 per year up to age 49 and $6,000 if you are 50 or older. The additional $1,000 for individuals over 50 years of age is referred to as a “catch up” contribution. Lastly, you will not be able to contribute to an IRA past the age of 70 1/2 years old.

If you are not eligible for the tax deductions of a Traditional IRA, you will still be able to contribute. The advantage of contributing to a non-tax deferred IRA is that your earnings (through investments) will not be taxed until you make a withdraw. This avoids the short and long-term capital gains tax of your Traditional IRA investments. This can grow to be a significant amount over long time periods.

Traditional IRA Income Distribution

During retirement, Traditional IRA distributions can provide a decent source of income. However, due to the tax advantages provided for this retirement account there are some restrictions concerning when you can withdraw your cash.

Traditional IRA holders can begin to withdraw from their account without penalty at the age of 59 1/2. If a withdraw is needed before this time, your account might incur a 10% penalty. However an account is exempt from these penalties in cases of permanent disability or death. Account holders over the age of 70 1/2 must begin to take the minimum distribution.

Traditional IRAs are a good investment and should be included in most retirement and financial plans. The tax deductions and tax avoidance is worth the hassle of opening a new investment account.