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February 5th, 2012
Gone are the days when a public sector pension guaranteed a comfortable lifetime retirement. Like their private sector counterparts, today’s public employees need to plan and save.
Stories abound about the fireman who retires at age 45 with a six-figure pension, or the city manager who leaves after just five years’ service with full salary and health coverage for life.
What doesn’t make headlines, however, is the growing number of public sector employees who have seen their retirement benefits erode in the face of budget cutbacks and mounting public deficits. States and cities across the country are taking steps to reduce pension costs by whittling away employees’ retirement entitlements. Even San Francisco, bastion of liberal handouts, recently saw voters approve a plan to scale back retirement benefits for city employees.
Although traditional pensions still dominate at all levels of state and local government, hybrid plans are emerging that combine a 401(k)-type component with a guaranteed benefit. In fact, 11 states — including Alaska, Michigan, Colorado, Florida, and Ohio, plus Washington, D.C. — now have primary retirement plans that include some defined contribution component.1
The upshot for public sector employees is that, increasingly, they are likely to need to augment their pensions with salary contributions to employer-sponsored plans or save on their own if they want to maintain their preretirement lifestyle. And since many states have “double dipping” laws in place that prevent public employees from collecting both Social Security and a state pension, the need to set aside their own funds for retirement is even more important.
How to Compensate
Several tax-advantaged retirement savings options exist that may be accessible to public sector employees. The most popular include:
- 403(b) plans are generally available to employees of qualified public organizations such as schools, hospitals, and certain nonprofit employers. Similar to 401(k) plans, 403(b) plans allow employees to contribute a portion of their salary on a pre-tax basis; and no tax is paid on contributions or earnings until it is withdrawn in retirement.2
- 457 plans are available to state and local government employees and are somewhat similar to 403(b) plans. There is no penalty for early distributions from a 457 plan (however, taxes are due), although you generally cannot take in-service distributions unless you have an unforeseen emergency.
- IRAs are available to both public and private sector employees. Like 403(b) and 457 plans, IRAs also offer tax-deductible contributions and tax deferral. However, IRAs have lower annual contribution limits and eligibility for favorable tax treatment may be subject to certain income limits.2
To find more information on these or other tax-advantaged retirement savings plans, see Publication 590 at http://www.irs.gov/.
Source/Disclaimer:
1Source: Journal of Pension Economics and Finance, “Behavioral Economics Perspectives on Public Sector Pension Plans,” April 2011.
2Withdrawals from 403(b) plans and IRAs prior to age 59½ may also be subject to a 10% early withdrawal penalty, in addition to ordinary tax on withdrawn amounts.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP®, a local member of FPA.
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December 30th, 2011
Although most Americans will not have to worry about 2012 taxes until early 2013 when 2012 tax returns are due, self-employed individuals or anyone who must pay quarterly tax payments will want to plan ahead.
And there’s good news for those that do. The IRS recently announced cost-of-living adjustments for the 2012 tax year that bump up brackets, deductions, and other thresholds for inflation.
The following is a summary of the key changes for 2012.
- Exemptions are up: The personal and dependent exemption increases to $3,800, up $100 from 2011.
- Standard deductions have increased: The 2012 standard deduction increases to $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separately, and $8,700 for heads of household.
- Tax-bracket adjustments: Tax-bracket thresholds have increased for each filing status (see table below).
- Estate tax exclusion has increased: The estate tax exclusion increases to $5,120,000, up from $5,000,000 for 2011. The annual exclusion for gifts will remain at $13,000.
- Earned income credits rise: The maximum earned income tax credit (EITC) rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC increases to $50,270, up from $49,078 in 2011.
- Transportation benefits adjusted: The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household.
Details on these and other inflation adjustments can be found in Revenue Procedure 2011-52.
2012 Tax Brackets
| |
Single |
Joint Filers |
Married Filing Separately |
| 10% |
$0 – $8,700 |
$0 – $17,400 |
$0 – $8,700 |
| 15% |
$8,700 – $35,350 |
$17,400 – $70,700 |
$8,700 – $35,350 |
| 25% |
$35,350 – $85,650 |
$70,700 – $142,700 |
$35,350 – $71,350 |
| 28% |
$85,650 – $178,650 |
$142,700 – $217,450 |
$71,350 – $108,725 |
| 33% |
$178,650 – $388,350 |
$217,450 – $388,350 |
$108,725 – $194,175 |
| 35% |
Over $388,350 |
Over $388,350 |
Over $194,175 |
December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP®, a local member of FPA.
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December 13th, 2011
A 2007 Census Bureau survey showed that more than half of all business owners run their company primarily out of a home.1 Today, that may be on the low side, given recent advances in mobile and wireless technology, as well as the cost-cutting realities of a low-growth economy.
If you’re considering running your business out of your home, there are a number of considerations you’ll want to take into account.
Is It Legal?
Perhaps the first issue you’ll need to address is making sure your home business meets zoning regulations and that any required licenses or permits are obtained. Many municipalities and condominiums restrict home business activities. If customers will come to your home, you may need to consider parking, disability access, and display of advertising. You may need to amend your homeowner’s insurance policy to cover commercial activities.
Technology
The significant advances in Internet technology and home office equipment in the past 10 years have made working from home realistic for a growing number of people, but there are technology issues you should consider. Find a local support person you can rely on to resolve systems issues quickly and effectively should the need arise. Save your work often, back up your files regularly, and make sure you have an alternative should your computer suddenly crash. Since high-speed access to the Web is a necessity for most home businesses, check with your local phone and cable company to see what’s available.
Taxes
If you operate a business out of your home, the IRS may allow you to deduct certain expenses — such as phone, Internet hookup, a portion of your rent or mortgage — based on the percentage of space in your home that the office occupies.2 To qualify, the home office must be used exclusively for business; a guest room or other shared space will not qualify. The key to claiming any of these deductions is to prove that they are necessary for and confined to business use.
Living Considerations
You should also consider how the work-at-home arrangement will fare from your family’s perspective. Will there be tension if you’re home all day? Will your presence cramp your family’s daily activities? How will your family interact with clients or employees? Many former work-at-homers cite family conflicts as the reason working at home didn’t work, so make sure to give this issue serious thought and discuss it with your family.
Finally, consider your daily interaction — or lack thereof — with business associates and employees. Depending on the nature of your work, you may find yourself isolated and miss frequent interaction with others. Many people need the social outlet that an office environment provides and may be uncomfortable spending long hours alone.
Source/Disclaimer:
1 Source: The Wall Street Journal, “My Home Is Not Your Home,” November 14, 2011.
2Mortgage interest and property taxes are also deductible under Schedule A and cannot be deducted twice.
December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP®, a local member of FPA.
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November 21st, 2011
With growing uncertainty about the future of Social Security funding, the Social Security Administration (SSA) suspended mailings of its annual statements. The move is expected to save the agency $60 million in fiscal 2012.
Previously, the SSA had sent all working Americans an annual statement about three months before their birthday. The statement included one’s lifetime earnings record, as well as estimates of retirement, disability, and family survivor benefits. It also reported earned credits, which indicated if one would qualify for Medicare at age 65.
Mailings for the remainder of 2012 will be limited to workers over 60, and longer term, the agency is working on an online download option for everyone else.
In the interim, you can access the same information online at SSA.gov, using one of the following methods:
- The Retirement Estimator gives estimates of your retirement monthly benefit, based on your actual Social Security earnings record. The calculator shows early (age 62), full (ages 65-67 depending upon your year of birth), and delayed (age 70). The Retirement Estimator also lets you create additional “what if” retirement scenarios based on current law.
- If you do not have an earnings record with Social Security or cannot access it, there are also other benefit calculators that do not tie into your earnings record. The calculators will show your retirement benefits as well as disability and survivor benefit amounts if you should become disabled or die.
Social Security should be a part of your retirement income planning. Make a point of checking out your estimated benefits at least annually so you know how much to expect — and how much you’ll need to provide from your own savings.
Also, remember that Social Security benefits don’t automatically increase every year. In 2011, benefits stayed the same as the previous year. For 2012, benefits will rise by 3.6% to reflect an increase in inflation
November 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP®, a local member of FPA.
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September 23rd, 2011
October 1 through October 8 is #FinancialPlanningWeek . Check out what how the Suncoast Chapter of the Financial Planning Association is participating at http://bit.ly/reAE0A
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June 6th, 2011
A friend of mine, who’s sister is a teacher, sent this to me. Something to think about when you vote to cut taxes.
”Teachers’ hefty salaries are driving up taxes, and they only work 10 months
a year! It’s time we put things in perspective and pay them for what they
do – babysit!”
Okay, let’s give them $3.00 an hour and for only the hours they actually
work; not for any of that silly planning time, or any time they spend before
or after school. For working hours, that would be $22.50 a day (7:45 to 3:15
PM with 30 min. off for lunch — that equals 7 1/2 hours).
Each parent should pay $22.50 a day for these teachers to baby-sit their
children. Now how many students do they teach in a day…maybe 25? So that’s
$22.50 x 25 = $562.50 a day.
However, remember they only work 180 days a year!!! We are not going to pay
them for any vacations.
LET’S SEE….
That’s $562.50 X 180= $101,250 per year.
What about those teachers with Master’s degrees? Well, we could pay them
minimum wage ($7.75), and just to be fair, after all they did complete more
than four years of college, round it off to $8.00 an hour. That would be $8
X 7 1/2 hours X 25 children X 180 days = $270.000 per year.
Hmmmm, wait a minute — there’s something wrong here! Indeed there is…
The average teacher’s salary (nationwide) is $50,000. Let’s add $10,000 for
health insurance each year. $60,000/180 days = $333.33 per day/25
students=$13.33/7.5 hours = $1.77 per hour per student–
Teachers…very inexpensive babysitters at $1.77 per hour and the added
bonus? They EDUCATE the children at the same time!!–
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May 25th, 2011
If you believe all of the pundits, reports indicate that the housing market may be starting to turn upward. While that may or may not be true, I get questions from clients often about what happens when they choose to sell their home. Due to declines in prices that occurred during the Great Recession, many sellers are finding their homes are worth less than what they paid for them. Unfortunately, if you lose money on a sale, the loss is not tax deductible. However, if you are fortunate to be selling with a profit, you may be able to exclude from income any gain up to $250,000 for a single taxpayer and $500,000 for a joint return. To exclude the gain, you must have owned and lived in the property as your main home for two of the five years prior to the date of the sale.
Your Adjusted Basis
A dollar amount known as your adjusted basis determines whether you experience a gain or a loss. If you purchased or built your home, your initial cost basis typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is the fair market value on the date of the decedent’s death or a later valuation selected by a representative of the estate.
The formula for determining your gain or loss is as follows:
Selling price – Selling expenses = Amount realized
Amount realized – Adjusted basis = Gain or loss
The cost basis may be adjusted over time due to the following conditions:
- Additions and other improvements that have a useful life of more than one year and that add to the value of your home. These can include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Note that repairs that keep your house in good condition but do not significantly enhance value, such as fixing gutters, repainting, or plastering, do not affect the cost basis.
- Special assessments paid for local improvements.
- Amounts spent to restore damaged property.
- Payments for granting an easement or right-or-way.
- Depreciation if the home was used for business or rental purposes.
- Others as determined by the Internal Revenue Service (See Publication 523 Selling Your Home).
The definition of a “main home,” according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your advantage to maintain records of a home’s purchase price, purchase expenses, improvements, additions, and other issues that may affect the adjusted basis.
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Some content provided by the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP(R), a local member of FPA.
Tags: Home Sale
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May 5th, 2011
Qubes. StreetTracks. HOLDRs. Names of popular rock groups? Not even close. They’re all investments called exchange-traded funds (ETFs) and many people use them to build a diversified portfolio. Maybe you should, too — if you understand the risk/reward trade-offs.
An ETF is a basket of securities, shares of which are sold on an exchange, such as the American Stock Exchange. They combine features and potential benefits of stocks, mutual funds, or bonds. Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand. Like mutual fund shares, ETF shares represent partial ownership of a portfolio that’s assembled by professional managers.
Types of ETFs
There are a number of ETFs, each with a different investment focus. Following are some common types of ETFs.
- Diamonds follow the 30 large-cap companies that make up the Dow Jones Industrial Average.
- Standard & Poor’s Depositary Receipts (Spiders) mirror the S&P 500, an index of 500 of the largest companies in the United States. They also track select sectors of the S&P 500.
- iShares & Vanguard ETFs hold baskets of stocks in specific regions of the world, select countries, or sectors, or follow U.S. corporate or government bond securities.1
- Qubes track the 100 largest businesses of the technology-driven Nasdaq Composite Index.
- StreetTracks replicate various indexes focused on sectors, countries, or investment style.1
- Holding Company Depositary Receipts (HOLDRs) are ETFs with a twist. They usually focus on narrow, emerging sectors — companies building the Internet infrastructure, for example — and their baskets hold only about 20 stocks to begin with. Stocks will never be added, and over time a HOLDR’s basket can become even more concentrated, as stocks that are lost due to mergers aren’t replaced. HOLDRs also differ from most ETFs in that they only trade in lots of 100 shares and shareholders can exchange their shares for the underlying stocks at any time by paying a fee.
Investors should note that because many HOLDRs are narrowly focused, they can be more volatile than other types of ETFs. Also, HOLDR investors will receive annual reports and other investment-related information for each of the 20 stocks in their HOLDR basket. On the other hand, they’ll only pay one brokerage commission instead of 20.
Different Structures
Originally ETFs were organized as unit investment trusts (UITs). In a UIT, an investment company buys a fixed portfolio of securities and then sells shares of that portfolio to investors. This type of structure results in dividends being held in an interest-bearing account, which are deposited into the ETF once each quarter. The delay in investing dividends can have a slightly negative effect on the total return of the ETF because the dividends are held as cash instead of being invested. Spiders, Diamonds, and Qubes are all organized as unit investment trusts.
Other ETFs, such as iShares, Select Sector Spiders, and StreetTracks, are structured as open-end funds. This arrangement follows the typical mutual fund structure in that new shares are continually offered and redeemed by the investment company. An open-end structure allows dividends to be reinvested immediately.
| ETFs |
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Advantages
- Potential tax efficiency
- Low expense
- Trade throughout the day
- No minimum investment
- Can be sold short and bought on margin
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Disadvantages
- Brokerage commissions incurred
- Capital gains occasionally distributed
- Flexibility may encourage frequent trading, potentially negating the tax-efficient edge
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Evaluating ETFs
These investments offer a number of potential advantages, including:
Tax efficiency – ETFs may be more tax efficient than some traditional mutual funds. A mutual fund manager may trade stocks to satisfy investor redemptions or to pursue the fund’s objectives. Selling shares may create taxable gains for the fund’s shareholders. Because ETFs are like stocks, redemptions aren’t an issue. In addition, managers of index-based ETFs only make trades to match changes in their index, which may mean greater tax efficiency.
Low expenses — ETFs that are passively managed (managers usually only trade shares to mirror underlying benchmarks) may have lower annual expenses than actively managed funds.
Flexible trading — Like stocks, ETFs are sold at real-time prices and trade throughout the day. Mutual funds, on the other hand, do not have this flexibility: Their pricing is based on end-of-day trading prices.
Can be sold short and bought on margin — Because ETFs trade like stocks, investors can use them in certain investment strategies, such as selling short and buying on margin. Traditional mutual funds do not allow shorting of stock or margin trading.
No minimum investment — Most mutual funds require a minimum investment, whereas an investor can usually purchase as few shares of most ETFs as desired.
Diversfication — An ETF may be a good way to add diversification to your portfolio. Buying shares of a technology sector ETF, for example, could potentially be less risky than purchasing shares of one technology stock — an ETF may own shares of many different technology companies.
| Inquiring Minds Want to Know … |
There are a number of Web resources that you can turn to for more information about ETFs. For all of the following sites, click on the Exchange Traded Funds (ETFs) heading in the top toolbar.
- NASDAQ® (www.nasdaq.com) — Updated frequently and contains trading quotes on specific ETFs.
- ETF Connect (www.etfconnect.com) — Includes prices, performance statistics, commentary, and tools for analyzing ETFs.
- ETF MarketPro (www.etfmarketpro.com) — Education, prices, research, and other tools specifically for ETFs.
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Of course, as with all investments, ETFs may involve risks and other potential drawbacks. Consider these factors before investing:
The trading flexibility of ETFs may encourage frequent trading. That could lead to the possibility of mistiming the market (moving stocks in and out of the market at the wrong times).
Brokerage commissions are incurred. For this reason ETFs may be better suited for a buy-and-hold investor or someone who is buying a large number of shares at one time, rather than for an investor who uses a systematic investment program.
There may be capital gain distributions. At times some ETFs have distributed taxable capital gains usually because the managers have needed to buy or sell stocks to match their underlying benchmarks. Additionally, government bond ETFs are subject to federal income tax.
You should carefully consider the risks of different ETFs. Many sector ETFs, for instance, will tend to be more volatile than an ETF that tracks the broader market. Check with a financial professional to be sure that you understand the risks and have the most up-to-date information before investing in an ETF.
Points to Remember
- Exchange-traded funds (ETFs) offer potential benefits and risks of both mutual funds, stocks, or bonds.
- ETFs have different types of structures: Some are set up as unit investment trusts. Others are structured like open-end mutual funds, and dividends are continually reinvested.
- Advantages of ETFs include potential tax efficiency, low expense ratios, flexible trading, and portfolio diversification.
- Disadvantages of ETFs include occasional distribution of capital gains, brokerage commissions, and the potential for frequent trading, which could lead to mistiming the market.
- ETFs may be better for a lump-sum investor with a long time horizon than someone who trades frequently and/or invests at regular intervals.
1Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities. Sector funds are subject to increased volatility due to their limited diversification compared with other stock funds.
Content provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Joe Downs, CFP(R), a local member of FPA.
Tags: ETFs, Investing
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April 21st, 2011
Your personal information may be for sale – and you may not even realize it. Spokeo.com is a website that aggregates your personal information from many different sources (including the white pages, social media sites, zillow.com etc) and provides the information for sale to anyone that wants to buy it – all without your knowledge or permission. Check out this link from Snopes.com: http://bit.ly/dNNMuV.
Go to www.spokeo.com and search for yourself. If you find your information there, Spokeo does allow you to remove it by clicking on the “Privacy” button and following the instructions.
Do It Today!
Tags: identity theft, privacy
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April 12th, 2011
Savvy investors have long realized that what their investments earn after taxes is what really counts. After factoring in federal income and capital gains taxes, the alternative minimum tax (AMT), and potential state and local taxes, your investment returns in any given year may be reduced by 40% or more. Luckily, there are tools and tactics to help you manage taxes and your investments. Here are four tips to help you become a more tax-savvy investor.
Tip #1: Invest in Tax-Deferred and Tax-Free Accounts
Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans and traditional individual retirement accounts (IRAs). In some cases, contributions to these accounts may be made on a pre-tax basis or may be tax deductible. More important, investment earnings compound tax-deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket.
Contributions to Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you are over age 59 1/2, have held the account for at least five years, and meet the requirements for a qualified distribution.
Tip #2: Manage Investments for Tax Efficiency
Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment professional can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.
Tip #3: Put Losses to Work
At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.
Tip #4: Keep Good Records
Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.
Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult your tax professional.
The information in this article is not intended to be tax advice and should not be treated as such. You should consult with your tax advisor to discuss your personal situation before making any decisions.
Content provided by the Financial Planning Association and Joe Downs, CFP(R)
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