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Five Reasons to Make an IRA
Part of Your Planning Strategy
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IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans, such as a 401(k).There could be an important tool already in your portfolio that can help you save more for retirement. It's your IRA. Nearly 50 million American households own an IRA, but it is often an overlooked component of most investors' financial planning strategies. In fact, over the past two years, only 15% of households that were eligible to contribute to an IRA did so.1
Have you forgotten your IRA? If you don't have one, should it be part of your overall investment plan?
Here are some compelling reasons why this vehicle can help you plan for your future:
Tax deferral:
Traditional IRAs allow your investment earnings to grow tax-deferred until withdrawn, typically at retirement. For 2011, the maximum contribution is $5,000, but for those aged 50 and over, the limit is $6,000. The limits are the same for a Roth IRA, but to be eligible to fully contribute, an investor must have a 2011 modified adjusted gross income of less than $107,000 for singles and $169,000 for married couples filing jointly. Singles earning up to $122,000 and couples earning up to $179,000 are eligible for partial contributions.
Deductibility:
If you are a single taxpayer who doesn't participate in an employer-sponsored plan and you will earn less than $56,000 in 2011, you can deduct your contributions to a traditional IRA off your income taxes. Couples earning under $90,000 are also eligible for a full deduction. Partial deduction limits also apply: up to $66,000 for singles and $110,000 for couples. [Note that Roth IRA contributions are not tax deductible.]
Investment flexibility:
IRAs typically give investors access to a wider range of investment options than workplace-sponsored plans, such as a 401(k). Depending on the financial institution you use to open your account, you can invest in a broad array of mutual funds, ETFs, individual stocks and bonds, CDs, annuities, even commodities and real estate.
Convertibility:
Traditional IRA holders can convert to a Roth IRA to enjoy some of the additional benefits listed below, but before you decide to make a switch, be sure to investigate the tax consequences of such a move:
Portability:
If you have assets in an employer-sponsored plan and you leave your job, you can easily roll over those assets into an IRA. Rolling over your assets can make sense, particularly if you change jobs frequently and don't want to devote too much time to coordinating and tracking your accounts.
Qualified tax-free withdrawals:
Since Roth IRAs are funded with after-tax dollars, your withdrawals are tax free, as long as you have held the account for at least five years and are over age 59 1/2.
No RMDs:
Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) once the account holder reaches age 70 1/2.
1Investment Company Institute, The Role of IRAs in U.S. Households' Saving for Retirement, December 2010 (http://www.ici.org/pdf/fm-v19n8.pdf) |
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Standard & Poor's Economic Report:
The Sum of Oil Fears
By David Wyss, Chief Economist, and Beth Ann Bovino, Senior Economist
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The continued wave of rebellion in the Middle East sent oil prices soaring above $100/barrel, their highest level in over two years. The unrest in Libya and the threat of unrest in Saudi Arabia added to worries of supply disruptions, especially within Europe. How much disruption will occur is completely speculative at this point, but even small changes in output can cause big price swings.
If the turmoil in the Middle East spreads to other oil producers, we could look back on $100/barrel oil with nostalgia. Prices could surpass the 2008 high of $148/barrel very quickly -- and $200/barrel is possible if there is a significant disruption in the Persian Gulf. We believe that the $150/barrel range could threaten to push the U.S. back into recession. The rule of thumb that we use is that a $10 rise in oil prices takes about 20 basis points (bps) off growth in each of the first two years of the price hike. This is a bit less than in the past because natural gas and coal prices no longer react significantly to oil prices.
Houses Move, But Prices Drop
Existing home sales rose 2.7% in January, while new home sales fell 12.6%. The divergence reflects two factors:
First, new home sales are counted when the contract is signed, while existing homes count at settlement, which means that the bad January weather had less impact on existing than on new sales.
Second, a tax rebate on offer in California created a spike in December sales in that state. The drop in new home sales was almost completely concentrated in the West (down 36.5%), but sales in the West (and nationally) remain up from November. The rise in existing home sales, in contrast, came from everywhere except the Northeast, which dropped 4.6%. The West rose 7.9%, the largest regional gain.
The inventory of unsold homes dropped by 0.5% for new homes, and fell 5.1% for existing homes. There is a 7.6-month supply of existing homes and a 7.9-month supply of new homes now on the market. However, this does not include the so-called shadow inventory of homes in process of foreclosure or being temporarily held off the market. Distress sales (foreclosures and short sales) accounted for 37% of existing home sales, up from 36% in December but down from 38% last January. Investors accounted for 23% of purchases (17% last January), and all-cash transactions were a record 32% of purchases (26% last January). The price of the median U.S. existing home fell 3.7% from a year ago, to $158,800.
The S&P/Case-Shiller Home Price Index (20-city) fell 2.4% from a year earlier in December, and is now down 31% from its July 2007 peak (and only 2.3% above its April 2009 low). We expect another 5% drop in the index before it hits bottom this spring. Only Washington and San Diego are up from the year prior. The largest declines from the peaks are in Las Vegas (down 55.6%) and Phoenix (down 54.5%). The smallest declines are in Dallas (down 9.4%) and Denver (down 11.5%).
The Rest of the Economy
Fourth-quarter real GDP growth was revised downward to 2.8% (annual rate) from the 3.2% reported a month ago. Most of the revision came from state and local governments, the spending decline of which was revised to 2.4% from 0.9%. We had been expecting lower state and local spending as governments try to eliminate their deficits, but the drop came somewhat earlier than expected. Consumer spending was revised slightly downward, to 4.1%, and the saving rate was unrevised at 5.4%.
Capital Advantage, Inc. financial advisors are available to answer your questions. Please call our office at 925.299.1500 or 888.299.1500 to speak with your advisor or to schedule your next portfolio review. Referrals to professional resources are also readily available upon request. |
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Four Tips for Tax Smart Investing
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At times, you may be able to use losses in your investment portfolio to help offset realized gains. 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 your investments and your taxes.
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.
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.
Feel free to contact Capital Advantage, Inc. advisors John Hayman, Donna Zinman or Gary Clarke for a list of trusted accounting professionals and other resourceful professionals you may need. |
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John Hayman, CFP
Founder and President
Email John |
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Donna Zinman, MBA
Executive Vice President
Senior Financial Advisor
Email Donna |
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Gary Clarke
Senior Financial Advisor
Email Gary |
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Rick McNamara, CFMC
Director of Investments
Email Rick |
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Dawnalizabeth Henke,
MBA, MSFA
Chief Compliance Officer
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Catherine Norris
Service Advisor
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Aimee Schwartze
Director of Client Service
Email Aimee |
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Amy Montano
Office Manager
Email Amy (AJ) |
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