Sushi Money

Do you worry about how your IRA is doing these days? If so you’re not alone, but what exactly you do about that is an entirely different question. Walter Updegrave discusses one reader’s concerns about this very issue in IRA freefall: Cash out or hold pat? .

Basically the reader’s question showed that he/she really had no idea about what their IRA was even invested in, or what strategy they had for investing in the first place. This is not uncommon, especially for most people who begin an IRA without the help of a professional advisor. For many of us, the IRA is the second place we save money for retirement after the employer’s retirement plan at work. Because it is a retirement fund though, we often worry about how it’s doing. It’s not very much fun to get statements in the mail showing the IRA value has declined over several months, especially if you’re close to retirement.

Do You Really Want the Money Now? There are many better options than to simply liquidate the IRA, take the money and plunk it in a bank or CD account. Doing that could be a very costly mistake, and result in a bundle in taxes and penalties with the IRS next year if it’s a traditional, deductible IRA. First, if it’s not a qualified withdrawal or rollover, you’ll have to pay a 10% penalty on the amount withdrawn if you’re younger than age 59 1/2, and then you’ll have to pay taxes on the withdrawal amount as well. Depending upon the size of your account, that could be a lot of money, could set you back years, and basically you may be starting all over with far less than you had if you had just left things alone.

If it’s a Roth IRA, you should be able to take out tax-free distributions anytime, as long as you are only withdrawing contributions that you have made to the account. This is not true for a traditional, deductible IRA. But even with a Roth IRA, if you take out excess contributions or earnings, you may be taking an unqualified distribution, and may owe taxes or penalties. But the beauty of the Roth IRA is that you can take out money that you have put in just about any time you want. You just cannot take out any earnings or gains on the money you have deposited over time.

* If you are considering closing your Roth IRA or taking out earnings, there are special rules for distributions. And the distribution rules for Traditional (deductible) IRAs are different.

But I Want My Money! In either case, let’s say you became really worried and closed your IRA account- within the last 60 days. In that case you may be in luck- you’re entitled to one rollover each year, as long as you do so within 60 days. So yes, technically, you can take out all of your IRA money, look around for a good long while, and then re-deposit it in a new account in less than 60 days and you won’t owe any taxes or penalties. Some folks even do this as a short-term loan. But you better make sure to get that money back in a new account in less than 60 days!

But guess what? If you close your IRA outright, financial institutions are normally required to deduct 20% automatically for federal taxes. And if you get busy and don’t find or receive the new IRA paperwork in time to get that money back in a new account within 60 days, you just may have taken an unqualified distribution, and won’t be able to complete a rollover. But at least a good chunk of the taxes are paid already, right? Ugh. That’s a less than ideal way to loan yourself money or try to keep it from losing value in the market. And you just started over- while you do have most of the money, your IRA is gone. You’ll have to start a new one if you want another IRA.

What’s a rollover really for? Usually a rollover is used to move retirement money from an employer’s plan into your own IRA. Or from one compan’s retirement plan, to your IRA and then to a new company’s retirement plan. It can also be used if you are moving IRA money from one institution to a new IRA at another institution to develop a new or different portfolio and investing strategy. Keep in mind that IRA rollovers are reportable transactions for IRS tax purposes, and you can only do this once per year. Some professionals believe that employers retirement plans may offer better options than an IRA over the long term. But it’s too easy to say that one is better than another outright. If you are comfortable with your employer’s plan, that’s great. Just make sure it is diversified over time. I like the option of spreading the wealth around, and having my own IRA at another institution such as Vanguard. Plus if you have your own IRA established, it can serve as a transfer vehicle if you move from one job to another throughout your career.

If you are just trying to move your IRA from one place to another, there’s a better way. Simply work with the new institution first, and you can transfer your IRA to a different bank, brokerage company or other financial institution.  An IRA transfer is different from an IRA rollover. With a transfer you are simply moving some or all of your money to a different institution. This is often called a trustee-to-trustee transfer. You can make unlimited transfers each year, and a transfer is a non-reportable transaction for income tax purposes. The new institution will simply help you fill out the required forms and paperwork to transfer your IRA directly to a new account, and you will never see the money personally.  A little paperwork and you’re done!

What Can I Do With My IRA?  So back to our original discussion: Why do people transfer IRAs and what else can we do with them? Even though IRAs have been around for many years, many people are just now realizing the power of an IRA. Your IRA can hold just about any type of assets in it. It’s just an account- and what you keep inside of it is up to you. You can have a money market fund for your IRA, or a mutual fund, or a basket of stocks. Your IRA can be with a bank, or a mutual fund company or as a brokerage account. Just because you opened the IRA with the bank down the street doesn’t mean you have to keep it there. You can move and re-establish that IRA with a new financial institution, and develop an entirely new strategy for investing for retirement.

Let’s say you completed the paperwork for the transfer- it may take a few weeks to get to the new institution. But once your money is in the new account, you can begin to implement your new goals and strategy.  For example, you may have transferred an IRA from a bank to a mutual fund company like Vanguard.  You can choose the type of mutual fund you want your money transfered to when you open the new account.  After the money is in that account, you can also re-allocate or direct some of that money to new mutual funds.

That’s basically how I approach it.  I prefer a well diversified portfolio of mutual funds in my IRA, along with a money market fund- what I call my Super Charged IRA. Why? Each year when I make my IRA contribution, it goes right into that money market fund. Then I can decide when and where I want the money in that money market fund to go. Then I divide it, or allocate that money into different mutual funds. All within my one single IRA. If I want to, I can even move money from the more aggressive stock mutual funds back into the money market fund. Normally I work on finding the right mutual funds, allocate the money, and then leave it alone. I try not to worry about the ups and downs of the market. It’s a strategy that works for me.

And that’s an important aspect of the article cited above: Implement an IRA strategy that builds upon a portfolio of diversified investments over time. And then leave it there to grow. As you get closer to retirement, that portfolio of stocks, mutual funds, etc, can be adjusted to fit your risk tolerance and other needs. Setting it up takes a little paperwork at first, but that’s about it.

What’s the hardest part? Having the patience and discipline to stick with it over time. Especially when the markets show the IRA as losing value. But if you’re having a hard time sleeping at night, that might tell you to think about changing your strategy, or maybe that you really don’t have a strategy to begin with and need one. You’re not alone- just read a few of the comments on that article. Most importantly however, it’s never too late to start.

* Investopedia has a great IRA information center for reference. There are countless different situations involving IRAs and retirement planning. If you are considering moving a lot of money around with IRAs, be sure to consult with your financial planner and tax professional. It might just save you a ton of money in taxes!

* Here’s a short review of some Common IRA Rollover Mistakes to avoid.

* Are you inheriting an IRA from someone? There are special rules for that too, and it may be time to sit down with a professional to review the best option for your situation.

* Here are some FAQ’s from the IRS regarding IRAs and Retirement Plans.

Now there’s a proposal that just might help the family budget across the nation- give Americans a gas-tax holiday this summer, and double the child tax credit. Of course after yesterday, our tax consciousness is about at its limit right now, but for those with children this could really reduce taxes going forward.

Senator John McCain’s proposal isn’t as strange as it sounds, especially with the price of gallon of gas pushing past a national average of $3.30. And with fuel prices continuing to rise, it’s about time somebody does something to lessen the cost. Something else needs to give, and if we could find a way to lessen the speculative fever that might help.

But do you know how much you pay in taxes for each gallon of gas in your state?

The federal government charges 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel.  And where I live our state charges us 18 cents tax on each gallon of both gasoline and diesel. Which is not too bad considering that some states charge as much as 31 cents or more!

API is a national trade association representing the oil and natural gas industries. Remember all those API specifications for oil and such? Lots of useful info if you’re in the industry, but it’s mumbo-jumbo to most of us. But they have some really nice charts regarding the taxes we pay for fuel in America.

Total Gasoline Taxes by State

Do you drive a diesel engine vehicle? With clean-diesel technology becoming a lot more popular, expect more demand there as well. I remember when diesel was much cheaper than regular gasoline, but not any more.

Total Diesel Taxes by State

If you live where gas prices are the highest, then you probably pay some of the highest fuel taxes too. It’s no wonder fuel costs so much in California!

Senator McCain has a few other ideas about reducing taxes for Americans, but I wonder if he’ll try to keep the Bush tax cuts in place instead of letting them expire in 2010? He voted against them in the past, but now says the middle class in American needs more help and lower taxes. Maybe he’s finally coming around. I just wish a few more Democrats would see the light on lower taxes as well.

For a daily picture of the national average for fuel prices, check out AAA’s Daily Fuel Guage Report. If you’re thinking about moving or close to retirement, the Retirement Living Information Center has some great tax-related info and can give you an idea of each state’s tax burden. And here’s a list of the national averages by state for gas prices from GasBuddy.com.

Still finishing those taxes?   Not surprising for many people, especially if you’re going to owe more money this year.  So this weekend is a busy time for completing all that tax paperwork.   Of course it’s also Master’s weekend at Augusta, Georgia and Tiger Woods is trying to put on his 5th green jacket in a race to do what no golfer has done before.  As of this morning he’s 7 shots behind the leader, but you never know what can happen when Tiger plays.  He can still win it by a mile!

There’s lots of tax tips out there to help answer your questions.  Personally I use TurboTax to do my taxes, and have been doing that for almost 20 years.  It’s a great resource, and makes filing pretty simple.

But I still roam the internet to make sure I understand everything.  Another great resource is the IRS itself, and their March 2008 Tax Tips offers some good insight.  Kiplinger has a short list of the Top 13 Most Overlooked Deductions that might be useful, and BusinessWeek offers their best Tax Tips for Procrastinators.

Remember: If you’re not sure how you can finish in time, or if you think you need more time to make payments, the IRS will work with you.  You can request an extension to file, and you can even make installment payments on the taxes you owe.  Remember, the worst thing you can do is to do nothing.  Take advantage of the offers to extend filing or making payments depending upon your situation.

If you need a break from taxes, or just love to watch those golf shots by Tiger, here’s a great roundup of some of his best!

Does anybody like paying taxes?   How many of you feel a personal, moral obligation to pay the government more money so that the politicians can decide what to do with it?   Between income, business, property, personal property, sales taxes, etc… it’s hard to imagine paying more.  For goodness sake, in my state we pay personal property taxes on items we’ve owned for years and years.  We pay the same tax, albeit at a lower amount, every single year.  For the privilege of owning a small outboard motor or equipment trailer for example, we get to pay taxes on the value of those items every single year. 

But guess what?  We are going to pay a lot more taxes in the years ahead.  MarketWatch spells it out pretty clearly in 10 Reasons Your Taxes Are Going Up.   I’m not going to dive into a debate about which political party is going to raise taxes more (even though the Democrats will!), but given the economic and demographic challenges the nation faces going forward, it’s hard to see a way around it.

I’ve got a few ideas:

• What if every now illegal immigrant actually paid taxes?  Many of the estimated 12 million illegal immigrant workers thrive in the other U.S. economy- the one based on cash.  If we can find a way to implement a guest worker program or something to increase legal immigration, think of the increased revenues we could see.  Of course, some folks just call them unauthorized migrant workers…  Uh, don’t think so-  illegal is pretty accurate. But more importantly, in terms of U.S. population growth between 2005 and 2050, the Pew Hispanic Center estimates that 82% of the U.S. increase of population will come from immigration.   We’ve got to encourage the legal immigration to this country, and for every citizen paying their fair share of taxes.  Admittedly, the entitlement benefits would also increase, but right now many illegal immigrants receive welfare and education services far in excess of what is paid into the system, and that’s got to change.
• Many working adults in society are not only going to live longer, but they’re also going to work longer.  If retirement is as much a crisis as many experts predict, then a lot of folks are going to be working a lot longer in life.  Those who do work longer will pay more in taxes, and that will help fund government programs.  Of course, working longer might be better for our health anyway.  But it would be nice to have that as a choice, and not a necessity.
• Implement a national VAT program.  What’s that?  It’s the great big, gigantic tax that is placed on everything you buy, seen in Canada and many western European countries today… it’s called a Value Added Tax.  Some say it’s a regressive tax because it’s a burden carried mostly by consumers regardless of income level, and because businesses recover a portion of the VAT every year.   So the VAT is supposed to be on the excees value throughout the production, supply and retail chain.   Seems like I remember someone proposing a VAT tax to fund health care in the early 1990’s?   It may yet come.
• Start a national lottery!  Based on the success of state lotteries, PowerBall and MegaMillions, it would seem that could be a huge source of revenue.  And why not?  If the states can do it, let the Federal government sponsor a few organizations to conduct a lottery.

Honestly, I am not a fan of increased taxation.  I would rather see our resources focused on helping businesses grow stronger, and bringing more business to the U.S.  But there’s another reason taxes are going up- and that’s simply because the wealth in society is growing larger.  

A recent study showed that global wealth of rich clients grew by 12% over the past five years.  Those same assets held by investors with over $1 million dollars is forecast to grow by 50%  and hit $75 trillion by 2012.  That’s an incredible sum of money… and somebody is going to find a way to increase taxes on it.  The gap between the poor and the very wealthy is growing wider.   Many of us are still climbing the slopes, but we too will pay our fair share in the years ahead.

I don’t like paying taxes, but I accept the necessity in order to fund certain programs and benefits.  I do not favor larger government programs that require further tax increases to maintain funding.  It seems like it’s going to be a huge wrestiling match in the years ahead, especially if people think we’re going to fund a national health care program.    Is that possible?  Do you want to pay for it? What else can we do?

So who’s going to be better for the country next year? How will Republicans or Democrats affect the economy or your portfolio? Asking those questions is a little like opening pandora’s box, but I can’t go into that voting booth without really looking at the candidates. Yet when it comes right down to it there’s a likeability factor that has to be there too. If I can’t identify with a candidate in some fashion, then it’s really hard to try and understand their views or beliefs on the issues.

Right now for example, a lot of folks have been swept away with the Obama movement. But are they really looking at the issues? Personally, I don’t think so. And neither does Matt Gonzales who writes The Obama Craze: Count Me Out. His expostion is one of the best examinations of Sen. Obama’s views and voting history that I’ve read to date. And I find myself appreciating his conclusions:

“Once I started looking at the votes Obama actually cast, I began to hear his rhetoric differently. The principal conclusion I draw about “change” and Barack Obama is that Obama needs to change his voting habits and stop pandering to win votes. If he does this he might someday make a decent candidate who could earn my support.
For now Obama has fallen into a dangerous pattern of capitulation that he cannot reconcile with his growing popularity as an agent of change. I remain impressed by the enthusiasm generated by Obama’s style and skill as an orator. But I remain more loyal to my values, and I’m glad to say that I want no part in the Obama craze sweeping our country.”

I just figured out today why he has shared those thoughts, considering Ralph Nader has asked Gonzales to be his running mate.  He sounds like a very principled individual however, and I appreciate his views.

Honestly, I do want to know what “change” means, not only for the economy but also personally. I want to understand how a potential candidate will affect my family’s future financial well-being over the next decade as much as the nation’s economic strength.   And admittedly I want to know how my portfolio could be affected by changes in tax law.

On the investment side, Mick Weinstein put together a brief summary of viewpoints on how investors might fare under the next White House leadership. Lots to consider but the comments were pretty interesting too. One reader named “Gianni” writes:

“I think Obama represents hope and change. Fidel Castro represented hope and change. He got the change part alright, but he ruined Cuba. President Jimmy Carter represented hope and change, and sure enough he changed a lot of things for the worse. The American economy was in the toilet while he was president and it took Reagan a few years to straighten things out. So hope and change sound good, but think carefully before you invest in hope and change. And consider the possibility that those big evil corporations are doing a fine job of providing us with our high standard of living…”

Think I prefer a more analytical approach to the issues, but I also agree that if the Democrats are elected we’ll probably see much higher taxes on both income and capital gains. Tax law just isn’t clear for 2009 and beyond. Will the next administration be investor friendly? Will individuals and families pay a lot more taxes? Of course any legislator thinking of raising taxes when the country is on the verge of a recession, inflationary pressures and housing bottoming out would be asking to be voted out of office.

Tax increases are on the horizon for a host of reasons including social security and medicare funding shortfalls as thousands of Boomers enter retirement for the next two decades. But if we think economic conditions are challenging right now, just wait until congress decides to raise individual and corporate taxes. It would be far better to do everything possible to make investing and growth favorable for business here in the U.S.A.

Whichever political party wins the election this year, they’ll also have an incredible opportunity and responsibility for affecting the nation’s economic future. All things being equal I favor a conservative approach to business and tax climate.

But change is certainly in the air. I’m just not sure what all that change means at this point.

We need an administration that constructively supports investment and growth over the long term. If the Democrats are elected, I only hope they think long and hard before saddling the nation with an enormous tax burden that will take years to overcome.

Whichever candidate takes the helm in 2009 will face an enormous balancing act. If they can succeed with a balanced, functional approach over the next few years, then that will be a real change. Who knows… we could even see the launch of a new bull market that will bring incredible opportunity for a decade or more.

     As the Superbowl rolls around each year I know it’s tax time again, and I await breathlessly (not!) for each envelope to come in the mail and report dividends, interest and other taxable income.  Actually I’d love to get taxes done a lot earlier if I knew I would get a refund, or if these envelopes showed up faster.  But I try to balance the taxes paid during the year well enough so that we either get a very small refund, or need to write a small check in April.  I don’t enjoy surprises when it comes to taxes, or giving the IRS more of our money than necessary!  So it’s time to spread everything out on great big table for a week or two…

     How do you do your taxes?  Do you outsource it to a professional, or do it yourself?  I’ve been doing taxes at home for a very long time.  I started using those gigantic tax encyclopedias, wracking my brain trying to figure it all out.  Then along comes TurboTax and I was saved!  I’ve used TurboTax now for over 18 years (crazy!) with great success.  But I still have questions and do research to make sure I’m plugging in the right data.  Any software program is only as good as the information you give it.  TurboTax does a wonderful job asking the right questions to make completing your taxes simple and efficient. 

     But you also need to be aware of things you can do to reduce your tax burden throughout the year, and make sure to take advantage of every deduction and credit you are entitled to.  Regardless of the software or books I read, I always have questions and a little confusion somewhere.  Just the nature of the beast perhaps.  One day I’ll get tired of wrestling with the tax pig, and have someone else do it for us.  Or maybe the FairTax will change everything?  Lots of help out there if you do have questions though.

     Kiplinger, via Yahoo has written a great little article on the 13 Most Overlooked Tax Deductions.   Great information to be aware of when your ready to sit down and crunch the numbers.  State Sales Taxes are one of my favorite deductions in recent years because it’s not that hard to keep track of receipts and watch the money add up.  For many taxpayers in states with income taxes, the sales taxes will easily provide a greater deduction, especially if a large purchase such as a car or appliance has been made.  We’ve talked before about keeping track of those receipts to make sure to get a larger sales tax deduction.

Kiplinger also writes about “What’s New for Tax Savings?” for the 2007 filing year, and MSN Money has a lot of great information in their Tax Center.  Another really great site for tax questions, resources and a host of other information is TaxTopics.net.  Do you know of any other good sites or info?  Let us know!

     I was reminded today that it’s not too early to think about 2008 income taxes.   We have 122 days left before the end of the year!  I was trying to determine some property tax information and realized I couldn’t find a particular form.  I did after much paper wrestling, but this brings to mind some things to think about for the last half quarter of the calendar year:

• Records: Get that shoebox and file folder organized for receipts and tax information… obviously I’m not as organized as I thought I was!  I need to keep better track of my potential deductions, especially business expenses.  Each year I find some deduction I missed, or something I could have done differently to improve my tax situation for the next year.
• Retirement: Think about IRA contributions between now and April 15 of 2008.  That’s the time we have left to make contributions for a 2007 IRA.  For 2007 the maximum amount is $4000, plus $1000 more if you’re over age 50.
• Gifts and Charitable donations:  A good time to begin planning strategy for the end of the year.  Are you thinking about increasing charitable donations?  Keep good records, and talk with your financial planner or CPA before making large financial gift decisions.  Remember, for 2007, $12,000 is the “annual exclusion” or the limit of gifts free of taxation.  You can give any individual up to $12,000 free of tax this year.  Wouldn’t you like to meet a few people like that…
• Rollovers: Qualified Employee Plan Rollovers and IRA Rollovers:  Now is a perfect time to consider your plan of action if you think you’ll be making a Rollover this year.  Remember that a trustee-to-trustee transfer is what you want, and that should prevent your company or brokerage from witholding 20% of your assets for tax purposes.  Be thorough about it, and make sure you give yourself time before the end of the year to complete the transfer/rollover.  Sometimes it takes a few weeks, or more.
• Capital Gains and other income:   It’s also a good time to assess how much different our income might be this year as compared with last year.  If there are (or will be) large capital gains or losses from investments or other asset transactions, think about how that will affect your tax situation.  Is there something you can do to offset those gains? 

     We’ll be hearing a lot more in the months ahead.  Is there anything you do in particular to help make tax season go more smoothly?  I usually need a few reminders to think about financial matters as we head into the Fall season.   The holidays will be here before we know it, and this year I’m going to work hard to stay ahead of the game!