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TOP 5 INVESTMENTS FOR BABY BOOMERS

TOP 5 INVESTMENTS FOR BABY BOOMERS

As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.

Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.

Here are 5 best investment strategies that you must consider:

Variable Annuity (VA)

Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.

Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.

U.S. Treasuries

U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.

For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.

Certificates of Deposit (CDs)

CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.

Real Estate

As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.

You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.

Individual Retirement Account (IRA)

It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.

Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.

Special Mention: The Wild Card

Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:

  • Starting your own business
  • Classic cars
  • Paintings and fine arts
  • Coins and collectibles
  • Sports memorabilia

That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.

To Conclude:

Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.

YOUR GUIDE TO ESTIMATING TAXES DURING RETIREMENT

YOUR GUIDE TO ESTIMATING TAXES DURING RETIREMENT

While retirement does mean no work, you still must pay your taxes. Unsurprisingly, paying taxes can get tricky during a time when you’re not actually working, and instead are relying upon savings (which no matter how large, is still limited). It is therefore essential for you to estimate the taxes that you must pay, and plan your budget accordingly to avoid any inconvenience later.

Taxes during retirement work the same way as they would when you work, i.e. calculated on the basis of your annual income. Every source of income is taxed differently, which is why it is a good practice to have sound knowledge of the various nuances of tax rules.

The following are the most common types of retirement income and the various tax rules for them:

Social Security Income

If Social Security as your sole retirement income source, you will probably not have to pay taxes in retirement. If you have income sources other than this, however, then at least a part of your Social Security income will probably be taxed. The amount of tax determined is based upon a formula, can vary from zero to 85%, depending on your additional sources of income. Other income sources are termed as “combined income” by the IRS, and this combined income is plugged into a formula in your tax worksheet which will determine the percentage of your benefits which will be taxed annually.

Usually, retirees with large amounts of monthly pension will pay up to 85% from their Social Security benefits, and will pay their total taxes at a rate of 15-45%. Retirees relying only Social Security mostly get their benefits tax-free.

IRA and 401(k) Withdrawals

Generally, retirement accounts withdrawals are during retirement. This includes both IRA withdrawals and withdrawals from plans like 401(k), 403(b), and 457, among others, all of which are reported as taxable income on your tax return. The percentage of benefits that you must pay as tax will depend upon a combination of your total income, your deductions and the particular year’s tax bracket. For instance, if your year has more deductions than income (say, for instance, if you spent a lot on medical expenses), you might be exempted from paying any tax on withdrawals for that particular year.

Roth IRA withdrawals, if done properly will be tax-free.

Pensions

Pension income is generally taxable. The best way to determine the tax on your pension is to use a simple guideline – if the withdrawal goes in before tax at the time of withdrawal, then it will be taxed. Since most pension accounts are funded with pre-taxed income, all of the amount will be written-off as taxable income each year on your tax return. In such cases, you can ask for your to be deducted from your pension check.

Annuity Distributions:

IRA or retirement account-owned annuities are taxed on the basis on tax rules in the section on IRA withdrawals. If the annuity was purchased with the help of money that was not within an IRA (or any another retirement account), then the tax will apply based on the kind of annuity purchased.

In case of immediate annuity, only a certain portion will be considered interest, and only this portion will be included in the taxable income section of your return. The annuity company will inform you of your “exclusion ratio” i.e. is, the amount of annuity income which will be excluded from the taxable income.

As for withdrawals variable or fixed annuities, the earnings need to be withdrawn first. This implies that if the account is worth more than your contributions, you will initially withdraw earnings or investment gain, which will be taxable. Upon withdrawing all your earnings, you will be withdrawing the original contributions, i.e. cost basis, which are tax-free.

Investment Income

Investment income works the same way as dividends, capital gains and interest income, by being reported on a 1099 tax annually. It is sent directly from the financial institution where your accounts are held. If you are systematically selling investments to generate income during retirement, every sale you make will generate a long/short term capital gain (or loss), which will subsequently be reported on your tax return. Taxes are nullified only when the other sources of income are not very high.

Selling your home

If the home you are selling has been lived-in for a minimum of two years, you have a high chance of not having your home taxed unless your gains are more than $250,000 (in case of a single person) or $500,000 (in case of a married couple). Renting homes have more complex rules, and tax calculations for the same require the expertise of a tax professional, who will help you determine the amount of gains which need to be reported.

THE RETIREE’S GUIDE TO PLANNING TAX STRATEGIES

THE RETIREE’S GUIDE TO PLANNING TAX STRATEGIES

Believe it or not, planning your ahead in time can helps you manage them efficiently once you have retired. In order to do so, you must have a thorough understanding of the various options that are available to you. Once you gain this understanding, you will be able to choose the right strategies which will help you keep your tax bill as less as possible. With the right decision, retirees can gain some control over their taxes thanks to the ability to being able to decide the amount that they need or want to withdraw from their retirement plans.

Here are a few tips to help you get started with planning your tax strategy:

  • Exemptions and Deductions: Make sure to take complete advantage of all personal exemptions and/or itemized or standard deductions. These will help you determine the amount of your income that should be tax-free. For retirees, taxable distributions can be coordinated with their medical expenses, property taxes and mortgage payments.
  • Increase your Retirement Contributions: This can be particularly useful if you have multiple available deductions. You can try withdrawing more retirement funds than when is necessary in a given year once your deductions exceed the taxable income. This will help you avoid paying extra taxes in the next year(s) which could have a low or even zero tax rate.
  • Defer retirement plan distributions: By deferring your retirement plan distributions until they are required by tax law or until you need them, you can keep your taxable distributions to a minimum, and therefore push your income to subsequent tax years. Taxpayers who wish to go with this plan should start withdrawing funds from their traditional IRA plans and 401(k)s once they reach the age of 70 1/2. Distributions should start by April 1 of the year next to the year in which the taxpayer turns 70.5 years; this is known as the “required beginning date.” You can calculate the minimum amount to be distributed by dividing your account balance by the life expectancy figures published by the IRS in Publication 590. To make things easier, you can try web-based calculators to estimate the minimum required distributions.
  • Elderly-specific tax credits: While taxpayers of and above the age of 65 are eligible for the special tax credit, actually qualifying for the same requires some careful planning, for the adjusted gross income (AGI) must be within certain limits.
  • Maximize your tax-free income: By selling their main home, taxpayers can have up to $250,000 exempted from their capital gains. If you are married, this figure will increase two-fold to $500,000. Interest that is earned from municipal bonds is also tax-exempt.

How is Retirement Income Taxed?

Retirees have a range of sources from which they earn their income, from pensions and annuities to Social Security benefits. Each of these sources are subject to a separate set of tax rules.

Social Security: Depending on your income profile, your Social Security can stand to partially or fully tax-free. While finding out where you stand does require some careful and complicated calculation, it is worth the benefits you will get in terms of less taxes and better planning.

Pension or Annuity Income: These can partially or fully taxable. Distributions will be fully taxed in the event that all contributions to your pension were made with tax-deferred dollars. However, if you have contributed any after-tax dollars for funding your plan, you can get some cost basis in the plan contract.

IRA Distributions: Depending upon the kind of IRA you have, your individual retirement account’s distributions can be fully or partially taxable, or even completely tax-free. Distributions get fully taxed when the taxpayer has a deductible traditional IRA. However, if you have any basis in a non-deductible traditional IRA, your distributions will be partially tax-exempt. Roth IRAs are mostly totally tax-free so long as you full two basic requirements, namely, your first Roth IRA should have been made at least 5 years before any distribution, and the funds should be distributed after you have reached the age of 59 1/2.

401(k) Plans: 401(k) plan distributions are fully taxable on account of the fact that these contributions were not included in your taxes when they were made. These get the same treatment as Roth IRA distributions.

TOP STRATEGIES TO MINIMIZE INDIVIDUAL TAXATION

TOP STRATEGIES TO MINIMIZE INDIVIDUAL TAXATION

With the end of the year approaching, many of you are probably already thinking about the applicable documents required to prepare your federal income-tax returns. Although most tax law provisions continue to be the same, certain key changes have been made.

It is always better for taxpayers to have a basic knowledge of individual taxation so that they can easily comprehend as well as implement tax-minimization and planning strategies. Such strategies are based upon the time in which the transactions have been made, which is why even a basic level of awareness of these can go a long way in taking advantage of available taxes. Furthermore, a well-informed taxpayer also stands a chance to ask relevant questions to his/her certified public accountant.

Above-the-Line Deductions:

Reported on Form 1040’s first page, these deductions are taken away from the gross income – the resultant calculation being the very-essential “adjusted gross income,” or AGI figure. These deductions are generally very helpful since they are calculated on the basis of the extent to which they cross the AGI percentage. Additionally, some other tax benefits phase-out at specified AGI levels. It is therefore only natural for taxpayers to want to take absolute advantage of any above-the-line deduction that they can get. Such deductions include (but are not limited to) tuition, interest for student loans, penalty on early withdrawal of savings, moving expenses, expenses for educators and deductions for retirement contributions.

Contributions to Retirement Plans

Generally, taxpayers experience a circumstance or event which makes them eligible to get an above-the-line deduction. For instance, he/she might have withdrawn or moved funds from a certificate of deposit before it matured. That said, deductions related to the funding of retirement accounts are controlled by working taxpayers.

Furthermore, mutual funds’ investments in which the fund manager gets a charge of making decisions regardless of tax implications should ideally be held in a tax-deferred retirement account like an Individual Retirement Arrangement (IRA) or a 401(k).

Last but not the least, some taxpayers with low income figures may be eligible to reduce their taxes by getting a retirement contribution credit.

There are other ways to reduce taxes as well. The applicability and effectiveness of these strategies depend upon the income, resources and know-how of the taxpayer.

Some of these methods are as follows:

-If you have an appreciated asset you should consider donating the property over selling it. Doing the former will allow you to deduct the fair market value of the property as a charitable contribution, and will help you avoid any tax that you would have to pay on any capital gain you would receive from a sale. Generally beneficial for high-income taxpayers. these contributions also help them avoid the new Medicare surtax on the investment income an asset.

– Another strategy that helps in minimizing taxes is holding municipal bonds which yield interest that are exempt from federal taxation. You can also try investing in municipals if it offers a percentage yield that is more than what you would earn on a taxable investment that is multiplied by one minus your effective tax rate. Before you invest, however, you must make sure to consult your tax adviser and determine whether the alternative minimum tax works well with your investment decision(s).

– In case you are planning to sell securities which will ultimately generate a loss, try to execute those sales in the financial year in which you stand a better chance of getting long-term capital gains from other items. Long-term capital gains, here refer to the gains that result from sale of capital assets which have been held for longer than a year. It is possible to reduce your capital gain (and by extension, your AGI) by applying up to $3,000 from any loss. Any unused capital loss can be brought forward to the next tax years and thereafter applied to the offset capital gains.

– Beware of “wash-sales” when you plan to hold a security for a year or less than that. A wash-sale takes place when you sell a security at a loss, only to buy similar securities within a month before/after the sale. Not only will the loss be disallowed during the sale, the disallowed amount will be added to the cost of the second purchase. All said and done, a wash sale can prove to be beneficial strategy if the loss can be deferred to another year.

A caveat:

For the next year, certain tax benefits for taxpayers with high AGIs have been reduced. This reduction is 2% for every $2,500, or fraction thereof, of AGI that exceeds $250,000 for single filers and $300,000 for taxpayers who are married.
Additionally, certain itemized deductions will be subjected to a maximum of 80% reduction for taxpayers with high income rates. The reductions stand at 3% for AGIs above $250,000 for single taxpayers and $300,000 for married couples.
Certain expenses such as theft and casualty losses and medical expenses are barred from the reductions. Medical expenses which exceed 10% of the taxpayers AGI, however, will be deducted.

To conclude:

Planning your taxes is an activity that requires consistent involvement on the taxpayer’s part all year-round. The simple-sounding act of maintaining organized records can go a long way in making an effective tax strategy.