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As we near the end of 2012, it’s time to start thinking about your finances for 2013. While some year-end planning might still be needed, it’s not too early to start thinking about next year. Many employers will start having their open enrollment periods over the next few weeks, and this is a great time to review your retirement plan contributions.
The new 2013 retirement contribution limits are as follows:
If you’d like to learn more, you can read the IRS press release here.
Please Note: With the passage of the Tax Cuts and Jobs Act of 2017, beginning in 2018 a recharacterization of a Roth conversion is no longer allowed. You may still recharacterize any Roth conversions done in 2017, but this will no longer be allowed for Roth conversions done in 2018 or beyond.
With the Bush-era tax cuts set to expire at the end of 2012, many investors are seeking ways to hedge against a potential increase in tax rates for 2013 and beyond. One option that should not be overlooked is the use of Roth conversions.
A Roth conversion allows you to pay tax on the converted IRA assets now, with those assets then growing tax-free for the rest of your life. It is generally preferable to defer taxes for as long as possible, but in a situation where tax rates may increase in the future, it may be worth locking in the taxes at today’s rates. For example, the top tax rate in 2012 is 35%; In 2013, the top tax rate may be as high as 43.4% (39.6% top marginal rate plus the 3.8% “Medicare surtax”). If tax rates don’t increase, you can always undo the conversion by recharacterizing the Roth back to a traditional IRA. As long as a recharacterization is done by the extended due date of the tax return (October 15th), you’ll just be back to where you started.
It is also important to recognize that a Roth conversion may bump you up into a higher tax bracket in the year of the conversion, depending on the amount converted. In that case, you should consider a partial conversion, where you only convert enough to stay within your current tax bracket. This is where the assistance of a tax professional can be invaluable.
Everyone’s situation is different, and whether a Roth conversion makes sense for you will depend on your particular circumstances and desires. Your financial advisor and CPA can help you weigh the costs and benefits of such a strategy to determine if it is right for you.
The RMD is the amount that Traditional, SEP, SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts in the year in which they reach 70.5. The RMD must then be distributed each subsequent year.
The standard deadline for taking your RMD is December 31st. However, you can use a one time exemption for your first RMD and delay until April 1st of the following year. If you choose to utilize this deferral you will have to take both your first and second year distributions that year.
The amount of your RMD is calculated by dividing the year end value of all of your IRAs by your distribution factor. Your distribution factor can be found using the IRA Uniform Lifetime Tables which are prepared by the IRS.
I am often asked if I know of any good books on investing for those just starting out. Many times this is for the children or grandchildren of my clients. While I do know of many such books, I find a few challenges. Investing books can be somewhat dry and boring, especially if you are not all that interested in the subject matter. While I think investing is definitely important, and investing well can make a huge impact, I also find that learning about investing without the basics of handling your financial affairs to be somewhat like putting the cart before the horse. By not paying attention to some of the basics everything can be destroyed in the blink of an eye. If we do everything correctly with basic financial management and planning, investing well becomes the icing on the cake.
A big turn-off to reading almost any book about money is the snooze factor. Many are about as entertaining as watching paint dry. The Wealthy Barber by David Chilton, however, takes a novel approach, providing some personal finance education in a narrative/story form.
It’s the story of three young adults who realize they don’t know anything about how to create a long-term financial plan for their future. They turn to a parent for help who points them to an unlikely expert: The local barber. This barber has managed to turn a low-wage job into a comfortable lifestyle with millions of dollars in the bank. Their monthly meetings include plenty of humor and enough character development to keep it interesting. The barber imparts such wisdom as the value of saving, wills, life insurance, retirement, housing, investing and taxes. The secrets imparted are simple, easy to follow, and illustrate that you don’t have to have high paying job to live the good life.
In my opinion, this book imparts valuable wisdom that is not only easy to read, it is also easy to comprehend and retain. It’s one of the first books I recommend anyone read on financial planning.
Some of our clients occasionally express concern about the situation in Europe. Here’s what our Director of Research, Larry Katz, has to say about Merriman portfolio exposure to those markets:
Europe’s ongoing debt problems have prompted many investors to consider their European exposure, especially to the euro zone’s weaker countries. While there certainly could be global impacts emanating from any area of the world, a major benefit of true global diversification is the controlled direct exposure to the problems of any given geography.
For example, one of our major portfolios is MarketWise Tax-Deferred, a globally diversified, buy-and-hold portfolio with a value and small-cap tilt. Half of the stock exposure of this portfolio is in the United States. The other half is distributed throughout the world.
Of the 50% overseas exposure, as of the end of March 2012 just over 22% was in Europe. Notably, most of that exposure was to the stronger European countries. The top six European countries by exposure (United Kingdom, France, Germany, Switzerland, Sweden and the Netherlands) comprised almost 18% of the total invested in Europe. The weaker countries of Greece, Ireland, Portugal, Spain and Italy totaled only 1.73%.
So a 60/40 stock/bond portfolio had just over 1% exposure to these five troubled countries.
Every portfolio has to incur various risks to generate returns. The key is to intelligently diversify so that, under a variety of market conditions, those risks remain under control.
If you are self-employed or have any self-employment income, you’ve probably wondered about the different types of retirement accounts available to you. Three of the most common types of accounts are SEP IRAs, Simple IRAs, and the Solo or Individual 401(k) plan. This recent post I wrote gives more information on these three account types. Here, I’ll focus on the Individual 401(k) and why it might be right for you.
The Individual 401(k) plan is, in many cases, the better choice for self-employed people because of several key benefits that aren’t available with the SEP or Simple options. (more…)