02/14/2007
Yes, I hate to break it to you but it is that time of year again. The time has come for many of us to get out our checkbooks and to write Uncle Sam a big fat one. Fortunately, this year you will be able to lighten the load you pay by socking away a little more in retirement savings.
A key tax law change took effect this year that allows investors to squirrel away more money in their 401(k) and retirement accounts.
The limits that can be contributed to 401(k) accounts are rising this year, but you probably haven't heard much in the mainstream press about it. I did read one good article in The Wall Street Journal that highlighted the tax law revisions. Short of that limited coverage, not much mention has occurred elsewhere. But hey, one of the reasons you subscribe to the Alert is for me to share with you the latest news on how best to manage your money and that's just what you'll always get.
Under the new law, the maximum amount that most of us can contribute to a 401(k) account will rise to $15,500 during 2007, compared to $15,000 last year. The exception is for people age 50 and older, who will be able to sock away an additional $5,000 by year-end. However, the savings limits for individual retirement accounts (IRAs) will stay at $4,000 for those under age 50 and $5,000 for those 50 and older.
There's also good news for those of you on the border of qualifying for a Roth IRA these past few years. The income limits for making contributions to a Roth are now higher. For couples filing their federal return jointly, the amount you can contribute phases out if your income is between $156,000 and $166,000. That's up from $150,000 to $160,000 in 2006. For singles, this year the range now is $99,000 to $114,000, up from $95,000 to $110,000 last year.
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Also new for 2007 is a tax law change that will help people who inherit money from an employer-sponsored retirement plan through any non-spouse. This change now allows a child, for example, to inherit 401(k) money directly from a parent's qualified retirement plan and to transfer those funds directly into an IRA. The inheritance then could be spread out over many years to avoid a big, one-time tax hit.
Another benefit to those inheriting money from people who die in 2007 is that estate taxes fall to 45%, down from 46%. The 1% difference may not seem huge but the amount can really add up when large estates are involved.
However, current law calls for the federal estate-tax exclusion to remain at $2 million in 2007 and 2008, before rising to $3.5 million in 2009. But the existing law has the exclusion disappearing entirely in 2010, before the limit becomes $1 million in 2011. Do not be surprised if the erratic levels of the federal estate-tax exclusions are modified by lawmakers before the end of the decade.
An interesting new tax break for 2007 applies to anyone who buys and pays for mortgage insurance this year. That new deduction phases out if your gross adjusted income hits $100,000. The exception is that the limit is just $50,000 for married people who file separately. I am sorry to say that anyone who bought mortgage insurance before this year is not eligible for the tax break.
One tax law change that can take money out of your pockets this year is an increase in Social Security taxes. Amid growing concerns that Social Security will not be able to fund its obligations, we should not be surprised that lawmakers are looking to us for additional revenue. Specifically, the maximum amount of earnings subject to Social Security tax jumps to $97,500 in 2007, compared to $94,200 last year. The heightened limit could cost certain taxpayers hundreds of additional dollars.
Overall, the tax law changes offer you more opportunities to save in 2007 than in 2006, so take the breaks that lawmakers are willing to give you. Beef up your 401(k) and IRA contributions to the maximum allowable amounts, if you can afford to do so. Any dollar saved from Uncle Sam's grip now will mean more money for you in your retirement years. My advice is to use these tax law changes to your best advantage.
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It is one thing to know that you can contribute more money this year to your retirement accounts, but it is an entirely different thing to actually take the steps to do so. I always say that there is a big difference between wanting to do something and actually doing it. Many people talk the talk, but far fewer actually walk the walk.
If you need a little help in walking that walk, we are here to help.
The following are what I call the five essential steps to invest wisely in your 401(k), 403(b), 457, variable annuity or other retirement plan(s). Taking these steps isn't difficult, nor is it extremely time consuming. But in life, there is no free lunch. You will have to exercise a little effort to make sure you know the key components of your particular plan. But trust me, the small amount of energy you employ will pay huge dividends -- literally -- when it comes time to hang up your work boots and go fishing.
Save more money. As we've already mentioned, this year the laws governing 401(k)-type plans have been changed to allow for higher total contributions. You also are allowed to contribute to a Roth IRA this year if your income does not restrict you from doing so. If there was ever a mantra that I could advocate you utter aloud to yourself each day, it would be this: save more money, save more money, save more money.
Understand your investment choices. Not all retirement accounts are the same. One I recently reviewed had more than 125 Fidelity funds to choose from, including sector, commodity, and country specific options. While this variety of fund options is atypical among 401(k) plans, it is indicative that every plan has its unique choices. In order to take full advantage of your plan, you have to understand the choices.
Know your exit rules. Some 401(k) plans are starting to put a damper on the number of trades -- also called “exchanges” -- that you are allowed to perform in your account. Knowing your plan's exit and trading rules will help you avoid costly moves that possibly could be avoided. It will also help those of you with very restrictive plans know what you're up against.
So there you have it: three quick steps to 401(k)-type plan success that require just a little time and effort. In return, I promise that effort will pay off handsomely. Get started on knowing your plan today. There is no better time than the present to start taking control of the future.
Last week we mentioned that the Iran menace is starting to become more and more of a risk factor, not just for financial markets but for the entire world at large. That country's march toward developing a nuclear weapon continues, but perhaps the more troubling news is that there now is evidence that Iran is supplying weapons to insurgents in Iraq.
I recently read an article in the U.K. Telegraph that said Austrian sniper rifles that were exported to Iran had been discovered in the hands of Iraqi terrorists. According to this report, more than 100 of the .50 caliber weapons, capable of penetrating body armor, have been discovered by American troops during raids of insurgent stronghold positions. The guns that were found were part of a shipment of 800 rifles that the Austrian company Steyr-Mannlicher exported legally to Iran last year.
Let me ask you all this: Is there any doubt that Iran is up to no good in Iraq and the rest of the Middle East? I think not, and unless and until somebody does something about this regime and its nefarious intentions, the risk posed by Iran will remain a constant concern.
While the Iran threat seems to be heating up, the threat posed by North Korea and its nuclear ambitions may be cooling down. North Korea currently is involved in negotiations with leading world powers, including the United States, to curb its nuclear program. A deal on the many issues surrounding this complex negotiation has yet to be reached but just the fact that the principal players are at the bargaining table talking it out already has lowered the risk meter from a nuclear-equipped North Korea.
So, one international risk factor increases while another appears to be on the decline. As the song says, the times they are a changin'.
Last week I got a question from an Alert reader that asked quite simply, “What is an ETF?”
Now while this question may seem rudimentary to some of you, I took it as a reminder that I have to make sure that whenever I talk about investing tools of any kind, or present investing concepts, that I don't assume everyone is completely familiar with all the terminology involved. So this week I just want to get back to the very basics by defining what, precisely, an ETF actually is.
The name ETF is short for exchange-traded fund. The simplest definition I've seen is that it is an index fund which is traded on the stock market. Now this definition, while succinct, doesn't do a whole lot to advance your knowledge of what an ETF actually is.
My basic definition is that an ETF consists of a virtual basket of stocks that usually tracks a specific index or sector. To put it another way, ETFs are like a homologous species of mutual funds that allow investors to buy into a specific area of the market without all of the hassles, management fees and trading restrictions imposed by traditional mutual funds.
The first-ever ETF was launched in 1993 on the American Stock Exchange. It was the S&P Depository Receipt, a.k.a. Spiders, SPDR (SPY). SPY offered investors a way to get into the S&P 500 funds without having to buy each individual stock. SPY was new at the time. It was a stock-like instrument that could be bought and sold throughout the day in increments as small as a single share.
It was exciting to be involved with the growth of the U.S. stock market and 500 of America's largest companies, without having to buy all 500 companies individually.
Today, ETFs have grown into broad indexes and include specialties and niches. We've covered many of the developments in the ETF world for the past several years here in the Alert and we plan to keep tracking this area as it continues growing and becoming more of a mainstay in an individual investor's arsenal.
Hey, it never hurts to get back to basics. I want to thank the reader who sent in that simple, yet all important inquiry about ETFs.
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“There are two possible outcomes: if the result confirms the hypothesis, then you've made a measurement. If the result is contrary to the hypothesis, then you've made a discovery.”
—Enrico Fermi, Nobel Prize-winning physicist
Have you made a mistake with your money? Don't worry too much; we all have erred at one time or another. The key is to realize that, as Fermi points out, when the result is contrary to your hypothesis -- you've made a discovery. When it comes to money and investing -- or just about anything in life -- how we react to our mistakes is the real issue.
We can choose to make a discovery and incorporate that new knowledge into our matrix or we can ignore the mistake and be doomed to repeat it. In the field of science, repeating the same mistake over and over is lunacy. So too are the mistakes you repeatedly make with your money. Don't be a victim of this mindset. Make your discoveries and become your own Nobel Prize-winning investor.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.