We received some good questions after last week’s article, “He Taxes Me, He Taxes Me Not.” This week we’re providing the answers.
Based on the way I’m currently investing, I have some questions about SEP IRAs and Roth IRAs. Can I open a SEP Traditional IRA and contribute to this even if I contribute to a Roth IRA? Is there any benefit to having a SEP Roth IRA (I'm not even sure this can be done)? If I can only invest in one type of IRA annually, which is the best alternative – a Roth or SEP Traditional?
-Kent in Atlanta, GA
Hi Kent,
Wow! These are some great questions! Here are some answers:
You can open a SEP IRA and continue contributing to the Roth IRA. The reason for this is that the business contributes to the SEP IRA while the individual contributes to the Roth IRA. I know that seems a little unique because in a sole proprietorship, the business is the individual, but from an IRS perspective, SEP IRA funds come from the business revenues, not the personal income of the individual.
There is no such thing as a SEP Roth IRA; as a matter of fact, the IRS pretty explicitly states that a SEP IRA cannot be in any way, shape, or form associated with a Roth IRA.
If choosing between investing in a Roth or SEP IRA, depending on your anticipated tax bracket in retirement I typically recommend the Roth IRA first, then supplementing with the SEP IRA. All signs are pointing toward higher income tax brackets in the days ahead. While we don’t know what they’ll look like 20 – 30 years from now, we do know that we can build tax free savings by going the Roth route. From a tax liability management perspective, I would always like to take a lower income tax hit today for tax free savings in the future. The SEP IRA defers the tax liability until you withdraw the funds in retirement.
Thanks for your questions, Kent!
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Showing posts with label goals. Show all posts
Showing posts with label goals. Show all posts
Thursday, September 24, 2009
Thursday, September 17, 2009
He Taxes Me, He Taxes Me Not
As the economy continues to lumber along in an upward direction, Americans are throwing open the storm shelter doors. Surveys of retirement plan participants show that investors are trading out of conservative investments and back into stock mutual funds.
For many years, conventional wisdom for investing for long-term wealth building held that you should pile every penny possible in traditional IRAs, 401(k)s, and other tax-deferred accounts. The assumption was that when you stopped working, you’d likely slide into a lower tax bracket. When you withdrew your funds from those investment accounts, you’d pay lower taxes on them. Conventional wisdom doesn’t always hold in unconventional times. Enter the Roth IRA.
The Roth IRA is perfect for spreading out the impact of taxes in your retirement years. With a Roth IRA, you pay your taxes upfront on the dollars you contribute. That means you pay today’s income tax rate. When you withdraw the funds in retirement, they’re completely tax free. Tax FREE!
With the tax cuts from the Bush Administration expiring soon and new taxes on the horizon, the Roth IRA may be exactly what your long-term wealth building plan needs. Many financial advisers are currently recommending a minimum of 30% of a person’s retirement portfolio be held in a Roth IRA.
Since there are tax implications for putting money in a Roth IRA, it’s important to know the rules. This year, the maximum contribution amount for individuals under age 50 is $5,000 (if over 50, you get an additional $1,000). Likewise, there are income limitations on Roth IRAs: individuals making more than $120,000 and married couples making over $176,000 aren’t able to contribute. However, in 2010 anyone will be allowed to convert existing retirement dollars to a Roth IRA without limitations.
When planning long-term investment strategies, always start with the goal of making money. From there you can protect those gains from taxes, and the Roth IRA is a great tool to help in that effort.
For many years, conventional wisdom for investing for long-term wealth building held that you should pile every penny possible in traditional IRAs, 401(k)s, and other tax-deferred accounts. The assumption was that when you stopped working, you’d likely slide into a lower tax bracket. When you withdrew your funds from those investment accounts, you’d pay lower taxes on them. Conventional wisdom doesn’t always hold in unconventional times. Enter the Roth IRA.
The Roth IRA is perfect for spreading out the impact of taxes in your retirement years. With a Roth IRA, you pay your taxes upfront on the dollars you contribute. That means you pay today’s income tax rate. When you withdraw the funds in retirement, they’re completely tax free. Tax FREE!
With the tax cuts from the Bush Administration expiring soon and new taxes on the horizon, the Roth IRA may be exactly what your long-term wealth building plan needs. Many financial advisers are currently recommending a minimum of 30% of a person’s retirement portfolio be held in a Roth IRA.
Since there are tax implications for putting money in a Roth IRA, it’s important to know the rules. This year, the maximum contribution amount for individuals under age 50 is $5,000 (if over 50, you get an additional $1,000). Likewise, there are income limitations on Roth IRAs: individuals making more than $120,000 and married couples making over $176,000 aren’t able to contribute. However, in 2010 anyone will be allowed to convert existing retirement dollars to a Roth IRA without limitations.
When planning long-term investment strategies, always start with the goal of making money. From there you can protect those gains from taxes, and the Roth IRA is a great tool to help in that effort.
Wednesday, September 2, 2009
Resurrecting Your 401(k)
Back from the dead, for many 401(k)s are beginning to recover with the recent market uptick. The question remains, though: is my 401(k) really going to make it?
Study after study confirms that investors chase past performance, buying whatever made money for other people. These same investors also chase their own past performance, buying more of what has worked for them in the past.
Economist David Laibson of Harvard University has researched 401(k) participants and their investment behavior to find they will add significantly to the funds they already own that have gone up in value the most. “Investors expect that assets on which they personally experienced past rewards will be rewarding in the future, regardless of whether such belief is justified,” Laibson says.
Apparently this is how investors are currently making their buying decisions. In June, 401(k) participants contributed about 41% of their investment dollars to stocks. In July, as the Dow rose by 725 points, 401(k) participants increased their funding of equity investments to 42.3% of contributions. At the same time, they were dumping value preservation funds that hold bonds and cash.
In The Intelligent Investor, Benjamin Graham wrote “the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizeable declines nor become excited by sizeable advances.” Basically, to be a true investor, you must strip emotion from you decision-making process.
Ultimately, to buy more of a stock, fund, or investment simply because its value has gone up is to believe that stocks become safer as their prices rise. This type of investing belief system is what perpetuates bubbles, not unlike what we’ve recently experienced. Defining an investment objective, maintaining a disciplined approach, and regularly saving money will help you avoid bubble-vision and make the most of that 401(k).
Like it? Check out LukasCoaching.com and join the Reader's Group to get real weekly insight about money, life, and business.
Study after study confirms that investors chase past performance, buying whatever made money for other people. These same investors also chase their own past performance, buying more of what has worked for them in the past.
Economist David Laibson of Harvard University has researched 401(k) participants and their investment behavior to find they will add significantly to the funds they already own that have gone up in value the most. “Investors expect that assets on which they personally experienced past rewards will be rewarding in the future, regardless of whether such belief is justified,” Laibson says.
Apparently this is how investors are currently making their buying decisions. In June, 401(k) participants contributed about 41% of their investment dollars to stocks. In July, as the Dow rose by 725 points, 401(k) participants increased their funding of equity investments to 42.3% of contributions. At the same time, they were dumping value preservation funds that hold bonds and cash.
In The Intelligent Investor, Benjamin Graham wrote “the investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizeable declines nor become excited by sizeable advances.” Basically, to be a true investor, you must strip emotion from you decision-making process.
Ultimately, to buy more of a stock, fund, or investment simply because its value has gone up is to believe that stocks become safer as their prices rise. This type of investing belief system is what perpetuates bubbles, not unlike what we’ve recently experienced. Defining an investment objective, maintaining a disciplined approach, and regularly saving money will help you avoid bubble-vision and make the most of that 401(k).
Like it? Check out LukasCoaching.com and join the Reader's Group to get real weekly insight about money, life, and business.
Thursday, August 27, 2009
Back to School Financial Frenzy
The dog days of summer slowly yield to the most wonderful time of year for parents: back-to-school time. That’s right, we’re standing on the threshold of the 2009 – 2010 academic year. Certainly your kids are eager to jump back into the learning world; field trips, science fairs, and late nights of algebra homework are just around the corner!
Are you ready to jump into the back-to-school shopping frenzy? Sure, part of the frenzy is dealing with back-to-school sales and the droves of parents and their children racing through aisles, cutting in check-out lines, and clogging parking lots. The other part is the frenzy of funding this annual adventure.
How do you typically pay for back-to-school shopping? According to the National Retail Federation, the average family with students in grades Kindergarten through 12 is expected to spend $548.72 this year. That’s a pretty big outlay each year for new clothes and school supplies. If we put these purchases on credit cards, we’ll likely still be paying on them when the last report card comes home next spring!
The best way to plan for back-to-school shopping is using a non-monthly expense account. Take what you intend to spend each year and divide it by 12. If you plan to spend $600 on your children, that’s $50 each month you can set aside in a savings account. When back-to-school season kicks into high gear, you can simply pull those savings out in cash (yes, the green stuff) and never worry about breaking the budget or making monthly payments until your kids are in college!
Try using this concept for all sorts of other non-monthly expenses: vacations, insurance premiums, birthdays, property taxes, and Christmas. This is a surefire way to avoid the budget busting blues all year long.
Like this? Join the Lukas Coaching Reader's Group for weekly insight on your money, career, and business.
Are you ready to jump into the back-to-school shopping frenzy? Sure, part of the frenzy is dealing with back-to-school sales and the droves of parents and their children racing through aisles, cutting in check-out lines, and clogging parking lots. The other part is the frenzy of funding this annual adventure.
How do you typically pay for back-to-school shopping? According to the National Retail Federation, the average family with students in grades Kindergarten through 12 is expected to spend $548.72 this year. That’s a pretty big outlay each year for new clothes and school supplies. If we put these purchases on credit cards, we’ll likely still be paying on them when the last report card comes home next spring!
The best way to plan for back-to-school shopping is using a non-monthly expense account. Take what you intend to spend each year and divide it by 12. If you plan to spend $600 on your children, that’s $50 each month you can set aside in a savings account. When back-to-school season kicks into high gear, you can simply pull those savings out in cash (yes, the green stuff) and never worry about breaking the budget or making monthly payments until your kids are in college!
Try using this concept for all sorts of other non-monthly expenses: vacations, insurance premiums, birthdays, property taxes, and Christmas. This is a surefire way to avoid the budget busting blues all year long.
Like this? Join the Lukas Coaching Reader's Group for weekly insight on your money, career, and business.
Back to School Financial Frenzy
The dog days of summer slowly yield to the most wonderful time of year for parents: back-to-school time. That’s right, we’re standing on the threshold of the 2009 – 2010 academic year. Certainly your kids are eager to jump back into the learning world; field trips, science fairs, and late nights of algebra homework are just around the corner!
Are you ready to jump into the back-to-school shopping frenzy? Sure, part of the frenzy is dealing with back-to-school sales and the droves of parents and their children racing through aisles, cutting in check-out lines, and clogging parking lots. The other part is the frenzy of funding this annual adventure.
How do you typically pay for back-to-school shopping? According to the National Retail Federation, the average family with students in grades Kindergarten through 12 is expected to spend $548.72 this year. That’s a pretty big outlay each year for new clothes and school supplies. If we put these purchases on credit cards, we’ll likely still be paying on them when the last report card comes home next spring!
The best way to plan for back-to-school shopping is using a non-monthly expense account. Take what you intend to spend each year and divide it by 12. If you plan to spend $600 on your children, that’s $50 each month you can set aside in a savings account. When back-to-school season kicks into high gear, you can simply pull those savings out in cash (yes, the green stuff) and never worry about breaking the budget or making monthly payments until your kids are in college!
Try using this concept for all sorts of other non-monthly expenses: vacations, insurance premiums, birthdays, property taxes, and Christmas. This is a surefire way to avoid the budget busting blues all year long.
Like this? Join the Lukas Coaching Reader's Group for weekly insight on your money, career, and business.
Are you ready to jump into the back-to-school shopping frenzy? Sure, part of the frenzy is dealing with back-to-school sales and the droves of parents and their children racing through aisles, cutting in check-out lines, and clogging parking lots. The other part is the frenzy of funding this annual adventure.
How do you typically pay for back-to-school shopping? According to the National Retail Federation, the average family with students in grades Kindergarten through 12 is expected to spend $548.72 this year. That’s a pretty big outlay each year for new clothes and school supplies. If we put these purchases on credit cards, we’ll likely still be paying on them when the last report card comes home next spring!
The best way to plan for back-to-school shopping is using a non-monthly expense account. Take what you intend to spend each year and divide it by 12. If you plan to spend $600 on your children, that’s $50 each month you can set aside in a savings account. When back-to-school season kicks into high gear, you can simply pull those savings out in cash (yes, the green stuff) and never worry about breaking the budget or making monthly payments until your kids are in college!
Try using this concept for all sorts of other non-monthly expenses: vacations, insurance premiums, birthdays, property taxes, and Christmas. This is a surefire way to avoid the budget busting blues all year long.
Like this? Join the Lukas Coaching Reader's Group for weekly insight on your money, career, and business.
Thursday, July 2, 2009
Life and Money Outside the Box
Would you classify yourself as an independent thinker? Would you say that you are a visionary? Your thought-life has direct implications on your real life, so what do you think about? In researching the characteristics of millionaires, independent thinking and casting vision are common denominators.
Millionaires think differently about everything – not just money – because they know that conforming to social norms is a recipe for mediocrity. From how they spend their time to how they use their energy, these people identify what is important to them and then go about pursuing it.
We tend to sensationalize millionaires in our culture, believing they all have private jets, homes around the world, and heated toilet seats. In truth, the typical millionaire in our country observes what works and doesn’t work, then casts vision for his or her financial future.
What works? Saving and investing money, making wise purchases, living with a purpose for monthly income, and helping others. What doesn’t work? Trying to borrow your way to wealth, having a “keeping up with the Joneses” mentality, following the herd, and being self-centered.
We’ve all heard the phrase “think outside the box,” and most of us recognize that we’re at our creative best when we avoid groupthink. What if instead of just thinking outside the box, you lived outside the box? What if the way you approached all of your financial decisions took into account what you want to accomplish for your life – not just tomorrow, but also ten years from now?
Thinking independently requires we get away from the noise and clutter in our media. Having a vision means sitting down and honestly deciding what you want out of this life. Creativity and a positive attitude accompany those who know what they want. They are the ones who align their beliefs and values with their actions somewhere outside the box.
Millionaires think differently about everything – not just money – because they know that conforming to social norms is a recipe for mediocrity. From how they spend their time to how they use their energy, these people identify what is important to them and then go about pursuing it.
We tend to sensationalize millionaires in our culture, believing they all have private jets, homes around the world, and heated toilet seats. In truth, the typical millionaire in our country observes what works and doesn’t work, then casts vision for his or her financial future.
What works? Saving and investing money, making wise purchases, living with a purpose for monthly income, and helping others. What doesn’t work? Trying to borrow your way to wealth, having a “keeping up with the Joneses” mentality, following the herd, and being self-centered.
We’ve all heard the phrase “think outside the box,” and most of us recognize that we’re at our creative best when we avoid groupthink. What if instead of just thinking outside the box, you lived outside the box? What if the way you approached all of your financial decisions took into account what you want to accomplish for your life – not just tomorrow, but also ten years from now?
Thinking independently requires we get away from the noise and clutter in our media. Having a vision means sitting down and honestly deciding what you want out of this life. Creativity and a positive attitude accompany those who know what they want. They are the ones who align their beliefs and values with their actions somewhere outside the box.
Wednesday, June 17, 2009
Want to Save some Money?
In this week’s Sunday edition of The Wall Street Journal, Brett Arends wrote a short article about saving $5,000, fast. Before we begin saving any money, though, we have to make a choice. Making a choice means taking responsibility.
There are three uses of money: we give it, save it, and spend it (the average American was brought into this world already knowing how to do the latter). In order to give or save any money, we must create a margin in our lives. Creating a margin requires that we live on less money than we make; this is the choice we make. Novel idea, I know, but when 70% of the country lives paycheck-to-paycheck, we have to lay this foundation first.
So what can you do to save some money? First, create a spending plan – or budget – you must know where every dollar is going in order to allocate more toward savings. Likewise, with a budget you’ll know exactly where each of those saved dollars is going so they don’t vanish. The vast majority of those who create a spending plan – and execute on it – feel like they get a raise because each dollar is accounted for and has a purpose.
Look at your grocery and eating out spending categories. Our rule-of-thumb is budgeting $150 per person per month in the household. Consider great resources like Angel Food Ministries to get groceries for more than 50% off. Pass on one restaurant meal each month and you’ll save around $600 a year.
If you’ve gone for more than two years without having your insurance policies re-quoted, it’s time to make some phone calls. If you have a solid emergency fund in place, increase your deductibles. Auto, homeowner’s, and life premiums are constantly being evaluated and updated. Just because you’ve been loyal to one provider doesn’t mean you’re getting the best rates. Consider contacting an independent agent who can find the best rates at a variety of providers. Don’t be surprised if doing this saves you anywhere from $300 to $1,500 in premiums this year.
Once you get the ball rolling, you’ll find plenty of other categories in your budget to generate savings. Look at your cable and cell phone packages, estimate savings by packing a lunch, and try brewing your own coffee at home instead of buying it on the run. Craigslist and eBay are your friends; sell what you know you don’t need and generate some cash.
All of these lifestyle and financial changes require a choice. Having a few thousand extra dollars in the bank would be sweet affirmation of a choice well made.
There are three uses of money: we give it, save it, and spend it (the average American was brought into this world already knowing how to do the latter). In order to give or save any money, we must create a margin in our lives. Creating a margin requires that we live on less money than we make; this is the choice we make. Novel idea, I know, but when 70% of the country lives paycheck-to-paycheck, we have to lay this foundation first.
So what can you do to save some money? First, create a spending plan – or budget – you must know where every dollar is going in order to allocate more toward savings. Likewise, with a budget you’ll know exactly where each of those saved dollars is going so they don’t vanish. The vast majority of those who create a spending plan – and execute on it – feel like they get a raise because each dollar is accounted for and has a purpose.
Look at your grocery and eating out spending categories. Our rule-of-thumb is budgeting $150 per person per month in the household. Consider great resources like Angel Food Ministries to get groceries for more than 50% off. Pass on one restaurant meal each month and you’ll save around $600 a year.
If you’ve gone for more than two years without having your insurance policies re-quoted, it’s time to make some phone calls. If you have a solid emergency fund in place, increase your deductibles. Auto, homeowner’s, and life premiums are constantly being evaluated and updated. Just because you’ve been loyal to one provider doesn’t mean you’re getting the best rates. Consider contacting an independent agent who can find the best rates at a variety of providers. Don’t be surprised if doing this saves you anywhere from $300 to $1,500 in premiums this year.
Once you get the ball rolling, you’ll find plenty of other categories in your budget to generate savings. Look at your cable and cell phone packages, estimate savings by packing a lunch, and try brewing your own coffee at home instead of buying it on the run. Craigslist and eBay are your friends; sell what you know you don’t need and generate some cash.
All of these lifestyle and financial changes require a choice. Having a few thousand extra dollars in the bank would be sweet affirmation of a choice well made.
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