Tax Friendly States

What you want to look for when you are planning what state would be best for you in retirement. It is very important that you look into what that state’s Income Tax rates and rules are; how they treat your Social Security, Pension and Retirement Incomes; as well as what their sales and property tax rates look like.  Lastly it would be good to keep in mind if the state you want to live in has any Estate or Inheritance Taxes that would affect your heirs and what you leave behind for them.

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Best States To Retire In

Top 9 States For Retirement

Always Keep In Mind:

• Income Taxes
• Sales Taxes
• Property Taxes
• Estate/Inheritance Taxes

Top States:

• Alaska
• Wyoming
• Texas
• New Hampshire
• Delaware
• Georgia
• Alabama
• South Carolina
• Colorado

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A 401k is a type of self-directed employer sponsored retirement account but it is not a pension.  While these types of retirement accounts are a service provided by your work, they are owned and managed by you. They allow employees to have savings invested while deferring income taxes (non Roth). Lets take a quick look at these 401k’s and how they work:

Traditional 401k

• Your employer will offer pre-tax contributions through payroll deductions
• Your taxable income is reduced by the amount you contribute (Maximum Contribution Amount 2010 & 2011 – $16,500)
• Not required but sometimes an employer will contribute to the plan (i.e. 50 cents for every dollar up to 6% of your pay)
• At age 59½ you can withdraw from the plan with no penalties but you will be taxed on the amount withdrawn
• Can be rolled over into an IRA tax free if you leave job
• If rolled over into a Roth IRA it will be taxed

Roth 401k

• Your employer will offer you to make after-tax contributions through payroll deductions (Maximum Contribution Amount 2010 & 2011 – $16,500)
• Doesn’t reduce taxable income
• Not required but sometimes an employer will contribute to the plan the same way as a Traditional 401k
• At age 59½ you can withdraw from the plan without penalties and tax-free
• Can be directly rolled over into a designated Roth IRA account without penalties

So what if my employer offers both Traditional and Roth IRA, how do I know which one to choose?

This all depends on where you plan to be financially when you retire.  If you plan to be in a low tax bracket when you retire then the pre-tax contributions from the Traditional 401k will be better for you.

Keep in mind that by the time you retire you may have fewer deductions, less dependents living with you, the house is possibly paid off, etc.  This would give you less to write off on your taxes therefore putting you in a higher tax bracket and keeping less of your money.

If you plan to be in the same or higher tax bracket then a Roth 401k is the better plan for you.  This way you won’t get killed in taxes because you already paid them when you were in a lower tax bracket.

Can I contribute to both Traditional and Roth 401k?

If you are offered to do both then you can take advantage of that as well if it makes sense to your financial needs.  But remember that if you have multiple 401k plans you can only contribute a maximum of $16,500 in total between the two retirement plans.

IMPORTANT: You don’t want to turn down free money so be sure to check with your employer to find out if and what the company will contribute.  If they only contribute to one of the 401k retirement plans be sure to take advantage of that plan.

What questions do you have regarding retirement plans?

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401K, 403B, IRA & Roth IRA Maximum Contributions

The IRS determines the 2011 maximum allowable retirement account contributions and nothing much has really changed since 2010.  A few of the numbers have budged a tiny little bit but since the Consumer Price Index shows minimal official inflation then the adjustments have been kept to a minimum. With the end of the year approaching now is a good time to check up where you are on your contributions and if their is any catching up you need to do before the year is out.  Here is the breakdown for 2011.

401K & 403B

The 2011 401K and 403B contributions are capped at $16,500 if you are under the age of 50.  Those at or over 50 years old in 2011 will be allowed an extra “catch up” contribution that maxes out at $22,000

IRA & Roth IRA

The contribution amount for IRA’s remain the same as in 2010 at $5000 for those under 50.  The over 50 “catch up” amount of a $1000 brings the over 50 cap to $6,000.

Roth IRA

Once thing that did increase in 2011 is the phaseout ranges for the Traditional and Roth IRA’s.  Married filing jointly can fully contribute to a Roth IRA with income up to $168,999.  The amount allowed to contribute begins to phase out at $169,000 and incomes over $179,000 can’t contribute.  For single and head of household the ranges are $107,000 and $122,000.

Traditional IRA

When it comes to a Traditional IRA you can deduct the amount you contributed if you meet certain criteria.

Covered By A Retirement Plan At Work

Married filing jointly couples can deduct the full amount of their contribution with an adjusted gross income (AGI) of $90,000.  Between $90,000 and $110,000 they are allowed a reduced deduction and after $110,000 there can be no deduction.

Single and head of household can take the full deduction with an AGI up to $56,000.  The phaseout period maxes out at $66,000.

NOT Covered By A Retirement Plan At Work

If you are single, head of household and qualified widow/widowers can deduct their full IRA contribution with no income phaseout.  Married couples can also deduct the full contribution amount with no limit UNLESS one spouse is covered by a retirement plan at work.  Should this be the case then they can deduct the full amount up to an AGI of $169,000.  Between $169,000 and $179,000 their is a phaseout period and then any incomes above that amount can not deduct any IRA contributions.

Hopefully this will help you as you determine your contribution amounts for 2011 to your retirement accounts. Being an active planner and preparer for your future will help to ensure a rewarding and dignified retirement.

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The other day Peter and I ordered breakfast from McDonalds, and we were saddened by the woman who took our order. She was a sweet old lady about 85 years of age. “Why is this woman still working?” I thought to myself. Perhaps she was bored in retirement, maybe she was lonely or worse yet, maybe she was part of the 62% of Americans who retire with less than $25,000 in assets and completely dependent on Social Security and Medicare for support. I don’t know this particular woman’s circumstances, but with the growing number of elderly people working at fast food joints or as “greeters” at Wal-Mart, it is abundantly clear that depending on social security and Medicare is not going to provide enough to support you in retirement. The bad news is that Social Security is expected to run out of money by 2030, long before any of us millennial’s even reach retirement age to collect social security.

The best way to ensure financial security in your golden years is to start saving for retirement as early as possible. Even starting with as little as $50 per month will add up quickly. When setting up a retirement strategy, make sure you cover the 4 bases of retirement planning for financial security.

1. Set up a Tax Exempt Account

It is a certainty that taxes will increase in the United States. Part of your retirement strategy should be to invest money in a tax exempt account such as a ROTH IRA, which will allow you to withdraw funds at retirement age( age 59 1/2) tax free. Peter and I opened our ROTH IRA’s withbecause of the very low commission fees per trade and the user –friendly trading platform. We invest in dividend paying stocks in our ROTH IRA and set up the account for a dividend reinvestment plan. The way this plan works is that any dividends we receive from our stock holdings are used to purchase additional shares of the underlying stock and best of all this service is automatic and it’s free. It’s like using compounding interest to your advantage; you purchase a stock that pays dividends, you use those proceeds to buy more stock which will then pay you more dividends. Once you reach retirement age and begin withdrawing funds, all money received is tax free. For 2011, the maximum contribution amount for a ROTH IRA is $5,000, but even if you can’t afford to fund $5,000, any amount is better than nothing.

2. Set up a Tax deferred Account

The next area of our retirement strategy focuses on the tax deferred account, such as a 401(K), Traditional IRA, SEP IRA , and 403(b). These types of accounts are funded with pre-tax dollars and the money grows tax free until disbursements begin in retirement. The best way to make good use of this type of account is to contribute enough money to receive the full company match offered by your employer. It’s like receiving free money. The down side to tax deferred accounts is that when the money is withdrawn, it is taxed at earned income levels, which is the highest form of income taxes in the United States.

3. Set up a Taxable Account

Peter and I also invest money through our brokerage account, such as those offered by. This type of account doesn’t have any obvious tax advantages, since money is invested using after tax dollars and any realized gains are taxable. However, if you invest long term, defined as owning a security longer than 1 year, you receive favorable tax treatment. Any realized gains on long term investments are taxed at a much lower tax rate of 10 – 15%, depending on the tax bracket you’re in. Any dividends earned in this account are also taxed at this lower rate. While you do have to pay taxes on the gains the year those gains are realized, the tax is much lower than for traditional IRA’s and 401 (k)’s, which are taxed at earned income tax levels (taxes anywhere from 10% up to 35%, depending on your tax bracket).

4. Invest in Guaranteed Income Products

Some people enjoy the security of having a guaranteed amount of money coming in every month. One such investment that provides guaranteed income is an annuity. A creative way to fund an annuity is to use a cash value life insurance policy and use a 1035 exchange. For example, let’s say you own a whole life insurance policy with a cash value of $100,000 and you’ve reached retirement age and no longer feel that you need the life insurance. You can use a 1035 exchange life insurance to annuity, which will allow you to use the cash from your whole life insurance policy to fund the annuity without triggering a taxable event. You would then earn a guaranteed amount of money for life, regardless of how long you live. However, a portion of the monthly income you receive is subject to earned income tax rates, and this amount is calculated by taking the amount of the investment, dividing it by the amount expected to be received based on life expectancy tables) and multiplying this ratio by the monthly payment. Your insurance agent will be able to tell you how much of your annuity payments are subject to income taxes.

This simple four step plan will help put you on the right path to creating long term Wealth and ensure a comfortable and financially secure retirement.

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A Traditional IRA is an individual retirement account that allows the individual to make contributions with “pre-tax” dollars, up to a specified annual limit determined by the IRS. 

What are the Tax Advantages?

Traditional IRA contributions are tax deductible, which means it lowers your taxable income.  The savings in taxes, however, aren’t realized until the individual files their taxes for the year in which the contributions were made.  The amount of the tax deduction depends on the taxpayer’s income and filing status.

Traditional IRA’s are similar to 401(k)’s in that the transactions in the account, including dividends, capital gains, and interest are not subject to tax while in the account, but are subject to earned income tax upon withdrawal.

What are the Maximum Traditional IRA Contribution Limits?

For 2011, the maximum annual contribution for individuals under 50 years of age is $5,000.  For those 50 years and older, the maximum annual contribution is $6,000.

Who Can Contribute to a Traditional IRA?

Age Requirements

There are no age requirements to participate in a Traditional IRA.  However, distributions from the account are not allowed until the individual reaches age 59 and 1/2 without tax penalties.  Early withdrawal penalties are 10% plus your current income tax rate.  In addition, distributions are required once the individual reaches age 70 and 1/2.

Minimum Income Requirements

The contributions to the traditional IRA can be up to 100% of compensation, up to the annual maximum allowed by the IRS.  The individual must have earned the amount of the contribution or more.

Maximum Income Requirements

Traditional IRA deduction amounts depend on whether or not the individual is covered by a retirement plan at their job.  See the tables below for maximum income limits and deductions.

Now that you are informed about the basic nature of Traditional Individual Retirement Accounts you can begin to make some informed decisions on if this type of retirement account fits into your overall retirement plan.

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With all the rules and regulations in place for retirement accounts, it’s no wonder why planning for retirement is so overwhelming.  One common question that is asked is “Can you contribute to a 401k and a ROTH IRA?”   The answer of course depends on your income.  Let’s start with the 401k.  Everyone can contribute to a traditional 401k, up to the maximum of $16,500 per year on a pre-tax basis, regardless of income.  For a SIMPLE 401k, the maximum contribution is $11,500 per year.  The IRS also allows catch- up contributions for those age 50 and over of an additional $5,500 per year for traditional 401k’s and $2,500 for SIMPLE 401k’s.  However, not everyone can contribute to a ROTH IRA.

So how do you determine if you’re eligible to contribute to a ROTH IRA?  If your earned income is within the limits established by the IRS, then you can also contribute to a ROTH IRA, up to $5,000 per year for those under 50 years of age.  The IRS allows individuals age 50 and older to contribute $6,000 per year to the ROTH IRA.  The income requirement can be found at the IRS website.  The 2011 ROTH IRA Income and Contributions Limit is also shown below:

Let’s look at an example.  If you are a single person, 30 years of age and earning $105,000 per year, then you can contribute up to $16,500 (on a pre-tax basis) per year into the 401K and also contribute up to $5,000 per year into the ROTH IRA.

Taking advantage of as many retirement planning and investment vehicles as possible can help to maximize your return in later years.

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Tax free withdrawals

Contributions and earnings from ROTH IRA’s are NOT subject to taxes and penalties once the account holder reaches an age of 59 1/2 years old.  The only requirement is that the ROTH IRA contributions are “seasoned,” which means that the money has to have been in your Roth IRA for 5 years from January 1 of the year you made your first contribution.

Roth IRA contributions may be withdrawn at any time without taxes or penalties.

Taxable withdrawals

Roth IRA earnings are subject to income tax and penalties if withdrawn before the age of 59 1/2 and the account hasn’t been “seasoned” for 5 years.

Exceptions to the ROTH IRA rules

Withdrawals from a ROTH IRA before the age of 59 1/2 are not subject to taxes or penalties in the following situations, as long as the ROTH IRA is seasoned for 5 years:

• Death
• Disability
• First time home purchase – Up to $10,000 lifetime maximum

Other Early Distributions

Distributions from ROTH IRA’s are taxable but not subject to penalties in the following situations, as long as the distributions are used for:

• qualified higher education expenses*
• medical insurance premiums after losing your job
• significant unreimbursed medical expenses
• buying or rebuilding a first home
• distributions as part of a series of substantially equal payments

*Withdrawal amount must not exceed education expenses.

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What is a ROTH IRA?

A Roth IRA is a special type of individual retirement account that is generally not subject to taxation once age 59 1/2 is reached.  The ROTH IRA is funded with “post-tax dollars” which means that you pay taxes on your income as usual, and then make a contribution into the Roth IRA.

What are the Tax Advantages?

Roth IRA contributions grow tax free, and distributions are received tax free once you reach the age of 59 1/2 and the ROTH IRA has been open at least 5 years.

What are the Maximum ROTH IRA Contribution Limits?

For 2011, the maximum annual contribution for individuals under 50 years of age is $5,000.  For those 50 years and older, the maximum annual contribution is $6,000.

Who Can Contribute to a Roth IRA?

Age Requirements

There are no age requirements to participate in a ROTH IRA.

Minimum Income Requirements

Minimum income must be equal to or greater than your annual contributions.  You must also have earned income in order to make contributions into the ROTH IRA.

Earned Income includes income received from wages, salaries, tips, professional fees, bonuses, and fees received for providing personal services. Earned income also includes compensation received from commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments.

Maximum Income Requirements

Single people whose adjusted gross income is $107,000 or less can contribute the maximum annual amount to a ROTH IRA.  If your income is between $107,000 and $122,000, you can’t contribute the annual maximum, but you can contribute up to a reduced amount.

Married couples whose adjusted gross income is $169,000 or less can contribute the maximum annual amount to a ROTH IRA.  If your income is between $169,000 and $179,000, you can’t contribute the annual maximum, but you can contribute up to a reduced amount.

See the table below or use the IRS worksheet to calculate your new reduced Roth IRA contribution limit. 

What Types of Income Affect ROTH IRA Eligibility?

Earned income is the only income that counts towards the ROTH IRA Income Limit.  Income from dividends, pensions, and rental properties are excluded.

Now that you are informed about the basic nature of Roth Individual Retirement Accounts you can begin to make some informed decisions on how and if they should fit into your own retirement plan.

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What You Need To Know About Bonds Before You Invest Another Cent

Many individuals own bonds nevertheless they know little about how the Bond Market operates or how these financial instruments truly work – That is Chilling!

In order to shed a little light on these seemingly unknown investment vehicles that almost everyone owns I’ve compiled the Who, What, When and How of Bonds.

So here’s the facts:

WHO: Bonds can be broken down into 3 categories

• Treasury Bonds – These are Bonds issued by the United States Government
  • These Bonds have historically been viewed as the most secure and as such provide the lowest return.
  • These Bonds are also known as Sovereign Bonds when issued by the other nation states.
• Municipal Bonds – These are Bonds issued by local cities, counties or states
  • Municipal Bonds are the middle ground in safety; not as safe as Sovereign Bonds (Treasury Bonds) but typically safer than Corporate Bonds.
  • One great advantage of Municipal Bonds is that the interest is typically earned tax free
• Corporate Bonds – These are Bonds issued by Corporations and other non-goverment organizations
  • Since businesses don’t have the power to tax the people and compel them to pay they are viewed as the riskiest. However they do provide the highest return on investment.

WHAT: Bonds are debt instruments, Also known as Promissory Notes. Think of them as IOU’s

WHEN: Bonds in the United States have thier interest payments made twice a year.

• The payments are made twice a year

HOW: The standards determining the price of the Bond are

• Face Value – How much the Bond is worth, its printed on the Note itself
• Duration – How long the IOU will be owed
  • Keep in mind that the farther out the Duration the more sensitive the Bond’s value will be to the interest rate
• Yield – influenced by changes in interest rates
  • When rates go up Bond values go down
  • When rates go down Bond values go up
• Market Price – The current value of the Bond
• Coupon Rate – The interest rate the Bond Issuer pays

Bonds are typically investments that revolve around the idea of safety and security. They are a great way to park and hold money that would otherwise be sitting in a savings account. The best bet is to find larger coupon bonds with shorter maturity dates from stable organizations and use them as savings accounts for excess cash holdings. Remember the best time to really own bonds is when interest rates are high and they begin to fall. In the United States currently the interest rates are near zero and can only go up.

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