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Tax Free Retirement Planning

Friday, February 13th, 2009

Employer retirement plans form the core of retirement savings of most of the self-employed people and small business owners. Sufficient knowledge of how the employer retirement plan forms the important part of your total retirement plan, is necessary to plan sufficiently for retirement.

Congress understands that employers should be motivated to help people in the retirement planning. It is aware that though many employees recognize the importance of keeping money aside, few realize the connection between their retirement savings and their total retirement plan. Hence Congress today allows employers providing an employer retirement plan to offer Qualified Retirement Planning Services to employees or their spouses as a tax-free fringe benefit.

The retirement planning service is paid by the employer. The cost of the Qualified Retirement Planning Service is not passed on to the employee or regarded as taxable income. Hence this service does not require Social Security, Medicare, or income tax withholding.

High earning employees can disconsider the cost of the service from income, provided the service is given to all the other employees without exception and who are generally educated and informed about the employer plan. However, the IRS can allow employers to limit retirement advice to people in the plan, approaching retirement age.

The Qualified Retirement Planning Services an employer offers can consist of advice and information about retirement planning for a person and/or his spouse and the relation between the employer retirement plan and their overall retirement plan. Employer retirement plans consist of SEPs, SIMPLEs, Profit Sharing Plans, Money Purchase Pension Plans, 401(k)s plans, annuity plans, and 403(b) and 457 plans. But the worth of any tax preparation, accounting, legal or brokerage services offered by the employer must still be considered as the taxable income of the employee.

If you find the idea of using pre-tax money to go for good professional retirement planning advice lucrative, then it is better to consult a qualified financial advisor. A qualified financial advisor can offer detailed information on the Qualified Retirement Planning Services open to you and your spouse.

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Retirement Planning Advice

Friday, February 13th, 2009

If you want to plan your retirement, but don’t know how, use these tips to help you design a retirement plan.

Develop the right attitude

It is important that you have decided to keep a part of your salary toward your retirement It can be as a bank savings account, a 401k plan, etc. The amount you save is not important, provided you keep it aside. You can then raise the amount saved, whenever you have spare money.

Find out your requirements

Retirement is expensive. Experts state that you will require 70% of your income before retirement to retain your current standard of living after you have retired. Consider the benefits you will obtain from Social Security. They return nearly 40% of your pre-retirement earnings

Your employer’s pension

If your employer provides a retirement plan, you should decide the benefits accrued and its worth. Before changing your job, check out if your benefits can continue with the new employer.

Avoid spending what you have saved

Do not use the amount you have saved for your retirement. Using it can cause a loss of principal, interest and tax benefits.

On savings and investments

The types of investments and inflation are the main factors on which the amount you can save and use once you retire, will depend. It is important that you are aware of how your savings are invested since your financial security depends on it. Be aware, the manner of saving is as important as the amount you save.

Get all details

Remember knowledge is power. Use the information from your employer, the union, the bank, or financial advisor, to take a right decision that will set you on the path of financial prosperity. Always ask questions and ensure you understand the answers.

Start your retirement planning early. Forethought on your part will take care that your retirement days are comfortable and enjoyable. Your financial security will depend on your time, commitment, and money. Get all the information you can and use it quickly.

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Retirement Planning Tips

Friday, February 13th, 2009

Many employed people do not consider retirement as though it is imminent. However people who understand the amount of money required to live comfortably later on in life, should understand importance of delaying the onset of retirement a little more. Many people follow the same process. They begin with big hopes of building a large nest egg. They spend years working, so that they have sufficient money to pay the bills but not enough to actually save. Most people know the importance of saving for their retirement, they just do not have sufficient money to do so.

How To Make Sure You Have Enough?

According to US government, people retiring today should have built a nest egg of minimum $500,000. You can reach this goal in many steps, provided you are aware of the method. Follow these things to plan successfully for your retirement.

Consult a financial planner, if you are young. Unless you are adept at the skills of saving and investing, it is best investment to hire an expert to assist you in planning and handling money. They can advise you on where to allocate your money, how much to devote to savings and how to provide for other things too.

The retirement plans: Many companies provide retirement plans like the 401K. Here you save a small amount from every paycheck and your company also does the same. This lets you save for your future prior to deducting the taxes from the paycheck. Also these savings remain tax free till you choose to use them.

To increase your retirement savings, start repaying your bills straight away and stop using your credit cards. If you use credit cards, you tend to spend more than when you use cash. If you have no money to pay for the expensive purchase, then just forego it.

It is important to plan for your retirement immediately. Whether the government help is forthcoming or not, if you want to continue with the lifestyle you are living now, or enjoy better lifestyle, you must build a decent nest egg for yourself.

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Planning Retirement For The Future

Friday, February 13th, 2009

Most employed people opt for retirement when they reach the age of 65. But when they actually reach the age, they may be quite slow and can find it difficult to enjoy the fruits of long years of service. But all that has changed now. By adopting certain tips to save money, people can opt for early retirement and enjoy the benefits.

Start by controlling the expenses. Major expenses like mortgage on a house and a car loan will require some time to be paid off. By reducing the luxury items and opting for equivalent items available at lower costs, you can save money that can be used to pay off the bills. Small things like washing your own clothes instead of taking them to the laundry or using a public transport instead of your car, can save money.

The next step for early retirement is to collect capital. Start saving early by opting for a good plan. Some banks and insurance companies offer good rates that can possibly double the money that you have saved for the tenure of 10 years.

Finally investing money will lead to its increase. There are various investment avenues that can double your money. Bonds, stocks, real estate property and business are few of the methods of doubling your money. Spending some money sensibly on solid investments is another method of collecting a certain sum of money and ensuring your dream of retiring gets fulfilled within 10-15 years.

It is not a simple task. There may be instances where you might be tempted to spend money on frivolous items. But to fulfill your dreams, there should be plenty of planning, patience and self-control.

Retirement is not the end but the start of the new phase of life. Here you give up your working life and go for a more relaxed life. This is the period where you can redesign your life and devote more time to your family or to the community.

Hence adequate retirement planning is essential for a healthy retired life, so ensure you begin the process right away.

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Retirement Planning

Friday, February 13th, 2009

Many people cannot accept the fact that retirement is imminent and after some time they will not be working any more. But the quality of your life after retirement depends on the proper planning of your retirement. However with the various retirement planning options, selecting the best plan is the key to successful retirement. Here we offer you a quick rundown on the various retirement planning options.

One of the most common retirement plans is the 401 K. In a 401 K, some amount is deducted monthly from your pay check. The money is tax deferred and so you do not pay taxes on the amount invested. Usually there are various investment choices like mutual funds, stocks, bonds etc. In some cases, the employer will match the employee’s contribution to the account, though these instances are decreasing.

The next option is IRAs. IRA denotes the individual retirement account and can substitute or complement a 401 K. There are 3 varieties of IRAs available: Roth IRAs, Traditional IRAs and Simple IRAs. Traditional IRAs offer you tax advantages whenever you deposit or add money to your account. On the other hand, a Roth IRA offers you the maximum tax benefit when you withdraw money from your account. A Simple IRA is just like a 401K with lower contribution limit, but cheaper and has lesser paperwork.

Few banks have similar programs for independent contractors. However if these choices do not meet your requirements, you can invest by yourself in mutual funds, stocks and bonds. Mutual funds combine money from various investors to invest in many different areas. One reason for its popularity is that it simplifies the diversification of assets for the investor. It works on the principle of not concentrating on only one area. Diversification is the secret to intelligent investing and consists of putting your money across various options, some high risk while others low risk.

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Mutual Funds and Stocks Comparison

Friday, February 13th, 2009

Diversification

Mutual fund companies invest in different stocks, bonds, and money-market investments; hence their risk is far lesser than stocks.

Management

Mutual funds allow investors to collect their money and hand it over to professional investment management. These managers are quite experienced with illustrious industry background and are very well qualified academically.

Higher Upside Potential

Individual stocks carry a higher upside potential than the mutual funds. Stock prices tend to fluctuate much more than mutual funds, so your chances of earning good returns are more.

Returns and Risk

Actually risk and return are related to each other. Higher the risk, higher the prospective return; lower the risk, lower the prospective return. Mutual funds try to lower the risk by investing in broad spectrum of individual stocks, bonds, or other securities.

Efficiency

Mutual funds can invest huge amounts of money. Usually they trade without paying any commission and have personal contacts at the major brokerage firms.

Conclusion

Investing in stocks will give you higher return than mutual funds. But investing in mutual funds reduces your risk. Mutual funds are excellent for financing retirement plans and for investors who do not have the time or energy to study individual stocks.

It has been observed that most expert traders in stock market also invest in mutual funds. It is highly advisable to invest in both of mutual funds and stocks. But for more experienced investor who has time and energy, it is better to invest a large part of their money in individual stocks.

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Mutual Funds or Stocks

Friday, February 13th, 2009

If you have some spare money after paying the bills and do not want to buy any gizmos or want to start a financially responsible life, you might be debating whether it is better to invest in stocks or buy mutual funds to get the best returns. This question should also be considered while setting up a retirement fund. To make the right choice, you should know what stocks and mutual funds are.

Stocks: Many people think they have a fair understanding of the meaning of stocks, just because they hear it daily in normal course. Stocks are units of companies that can be bought by public in open trading on the stock exchange. Stocks are generally sold in packs, so when you opt to buy the stock of a certain company, you have to make a minimum purchase. Stockholders are directly affected by the price of their stocks as it is directly connected to the company’s performance and hence have a vested interest in the profitability of the company. Stocks are segregated into the type of business they operate, called as sector.

Mutual Funds: Mutual funds are groups of investments that gather money from many investors and use the money to purchase stocks, bonds, and other investments. Mutual funds are generally handled by a certified professional, as against stocks that are managed by the private individual. Basically, mutual funds include various types of stocks.

The choice between investing in stocks or mutual funds basically boils down to the personal expertise and amount to be invested of each individual. Many people are attracted by the luck factor involved in purchasing stock, and the opportunity to invest individually in the reputed company. But the fact is that by the time the stocks are offered to the public, they are already over priced. Also investing in single stocks is a very risky process since your returns depend on the profitability of a single company. Even wealthy investors have broad-based portfolios as they invest their money across various types of stock. But this process can be expensive for the common man.

For the first-time investor, buying mutual funds is the best bet. Mutual funds combine the costs of various stocks, reduce the risk of financial losses and increase the prospects of profits. Mutual funds do not give you the thrill of investing in a high-flying stock, but provide good long-term financial gains. Also since the mutual funds are managed by experts well versed with the drawbacks and advantages of the investment world, they can reduce both risk and the time required to select individual stocks by research and appointments. Mutual funds also divide the risks among various investors, and are managed by people who have strong network inside the financial world.

For the person having spare money but no time or the expertise to “play” the stock market, mutual funds are their best bets.

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Secret Fees and Mutual Funds

Friday, February 13th, 2009

Many investors harbor the mistaken notion that there is no charge for investing in mutual funds. But this is wrong. Funds earn over $50 billion annually as fees from investors. The first way you lose money in a mutual fund is by paying the high fees levied. These fees can drastically lower your returns over a period of time.

As these fees are automatically subtracted from a fund’s returns they are hidden from you, since there is no invoice or trouble of writing a check. If you invest $10,000.00 in a mutual fund whose expense ratio is 2%, a sales load is 3%, and annual returns are 7.5% for 20 years, your investment would nearly treble to $27,508.00.

But the drawback is you would have to pay $14,970 as fees and lost earnings for 20 years. So bypassing the system and purchasing stocks directly will help you save money and earn better returns.

Besides there is a lot of hype surrounding the selling and management of these funds. These funds also indulge in other malpractices like short term trading, and hiding important information from the public. These are the strategies that any successful investor must avoid. Also the industry works by throwing the investors off the track by elaborating on past performance, which must always be ignored. Many mutual funds swindle the investors by charging excess fees as investors don’t realize that these high costs erode their profit. Mutual funds don’t want to educate the investors as their gullibility makes them an easy prey to the industry’s wiles.

Do not trust the mutual funds except the indexed ones. Indexing means the mutual fund just buys and sells stocks in their portfolio with the help of a computer to ape the structure of a major stock market index like the S&P 500. This does away with a fund manager extracting high fees.

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Mutual Fund Perils

Friday, February 13th, 2009

The primary principle underlying the formation of the mutual funds was that a single person could focus and handle the investments of huge amount of money from various investors. In the old days, prior to great depression mutual funds were also known as investment pools and mutual fund managers were known as pool operators. The bull market of 20s produced the economic boom that was similar to the situation of 90s. It was at this time the idea of the pyramid scheme first conceived.

The pyramid scheme was discredited in 1920 with the arrest of Charles Ponzi for giving untenable returns on postal certificates. This caused massive losses to the investors who fell for the Ponzi’s well-planned fraudulent job and his name got associated with this type of jobs. He earned massive profits by purchasing the postal certificates in Europe at reduced price and then selling them for high price in the US. Sadly, people never considered the idea of the investment pool as the latest type of Ponzi scheme.

Investment pools were finally considered by people as a type of fraud. This is because a pool operator had the authority to rob the people. Instead of protecting the interests of the investors, the pool operators indulged in risky investments since they did not own the money. Their fees were quite high. So when the stock market crashed in 1929, the people understood that investment pools were a big scam perpetuated on the unsuspecting public.

The pool managers misused the system to such an extent that ultimately the Security Exchange Commission (SEC) was formed mainly to check these conmen. The SEC managed to close down the more obvious scams. This made the securities industry change tacks and they introduced the investment pools as mutual funds to lure gullible public back in their grip.

Try to stash away your money in an indexed mutual fund if your 401(k) provider allows it. An indexed mutual fund tracks a stock market index like the S&P500 to inform you about the stocks purchased. The Vanguard 500 (VFINX) is the largest and oldest indexed mutual fund.

The cash held by the fund is divided to try to track the index to the closest possible degree. Also there is no fund manager involved in the fund to rob you of your retirement savings under the guise of fees.

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MUTUAL FUNDS AND TAX TRAP

Friday, February 13th, 2009

The non-indexed mutual funds make you lose money by making you pay taxes. You might be liable to pay taxes though your mutual fund makes a loss. However for many people this is highly unforeseen event. This is how this contradictory event takes place. Legally, mutual funds do not have to pay taxes. Instead they pass on these taxes to the shareholders of the mutual fund, which means you are forced to pay the taxes.

If the fund manager sells the stock at a price higher than its cost, the fund makes the profit. This profit is known as a capital gain and is taxed. Capital gains carry the regular income tax rate of 28%-38.6% for the investors holding the stock below the year. For the investors holding the stock for over a year or long term, the tax rate is 20%.

There are some reasons why mutual funds have to pay taxes. If the fund performance is poor, investors tend to leave. The mutual fund is forced to sell stock to pay the leaving investors. Though you may not be one of the investors wanting to leave, you will still be taxed your share of the capital gains tax.

The other reason for paying taxes is the dividends paid. Dividends are taxed as per share income distributions that companies make from their quarterly earnings. Many investors choose to automatically reinvest their dividends. This provides the fund with the money to purchase more shares for you. So if you reinvest and yet do not take out a single cent from the dividends, they are still taxed as per the IRS rules.

The other reason for paying tax is the high turnover. Turnover is the rate at which a fund manager purchases and sells shares, at times to avail of the next winning stock or undervalued stock that is about to shoot up. The average funds in 2000 had a turnover rate of 122%. It implied that the whole portfolio between January and December had changed and about 22% of the replacement shares too changed.

It is the extreme case of account churning. You should remember that when you are purchasing a fund you are taking on the tax liability. The excellent method of not paying these taxes is to limit your purchases of mutual funds to your 401(k) and just buy indexed mutual funds.

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