Posted by Ryan on December 4th, 2007 in Investment Planning

Managing savings through your company’s 401k has a tremendous number of benefits, but how much can you actually contribute to this retirement plan?

The 401k tax law can be quite confusing. For the most part, your 401k contribution limit depends on the lower of:

1. Your company’s 401k contribution limit compared to your income. For example, if you make $50,000 a year and your company limits contributions to 10% of salary, the most you can contribute is $5,000.
2. The government imposed 401k contribution limit, which is $15,500 a year for 2007 and 2008 (expected to adjust for inflation).

There is one exception to the above. If you receive an employer match, the total annual contribution to your 401k can actually be greater than the government regulated maximum. How? Your maximum allowable 401k limit does not include your company’s contribution. Let’s say you make $100,000 and you max out your 401k early by contributing 20% of your income. Let’s also say your company matches your contributions with $1 for every dollar you contribute up to six percent of your eligible compensation, (which is the maximum federally imposed employer contribution), or an additional $6,000. This brings your 401k balance for the year to $21,000, or almost 30% greater than the maximum contribution regulated by the government.

Other stipulations also exist, such as catch-up contributions, which allow employees 50 and older to contribute an additional $5,000 for 2007.

Millionaire Money Habit: As you consider how much you should invest in your retirment plan, remember that your 401k contribution limit is a pre-tax investment. What that means is you pay yourself before paying taxes or anyone else. This has many advantages, such as reducing your taxable income. If you invest in nothing else, take advantage of your 401k’s ability to make you a millionaire over time. -RT

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Posted by Ryan on December 2nd, 2007 in Investment Strategy

Jim Cramer mentioned something recently on his CNBC show, Mad Money, that should have resonated with investors. “Cash is no longer king.”

What Does He Mean?

Let’s clarify that Cramer is not referring to the cash in your pocket. Cash for some time has been king because fixed-income, cash investments have offered great returns. These investments have offered investors solid returns and a safe place to store money. For the conservative investor, money market savings accounts, CDs, and municipal bonds have been a low-risk way to beat inflation.

So Why is Cash No Longer King?

Wall Street is pretty confident that the Federal Reserve will continue to cut rates. Federal Reserve Chairman, Ben Bernanke, stated on Nov. 29^th that the Fed is “alert and flexible” as the weakening condition in the financial markets may have a broader affect on the economy. This is coming off the heels of No. 2 official, Donald Kohn, who stated the day before that the central bank must remain “nimble.”

Is Cramer right? Is cash no longer king? Well, we already know that the federal rate cut is bad news for savers and as things can potentially worsen, the Fed will likely continue to cut short-term interest rates. This will make cash investments less valuable. Cramer speculates that over the next year, short-term rates will continue to come down, and the yield you have been used to receiving from your CD will also come down. As the rates come down, your cash investment will no longer be able to keep up with the rate of inflation.

Now What Do We Do?

If Cramer is right, you should get out of your cash investments. If you have a CD, do not to renew your CD when your investment matures. Many times this will happen automatically unless you request to cancel the investment. But be sure not to withdraw early and incur early withdraw penalties.

Now Where Do We Go?

With the recent decline in the stock market, there are some great buying opportunities in equities. Cramer suggests the financial sectors, which have experienced huge declines, may be oversold, and offer great dividends. Take a close look at Bank of America, Citigroup, and Freddie Mac for example, but there are opportunities throughout the market in all sectors and industries.

Considering we are entering a pre-election year, which makes it historically the best time ever to be in the stock market, Cramer may be on to something. Secondly, with the recent panic there is a lot of cash on the sidelines that investors will need to put somewhere. With fixed-income investments being unattractive and stocks looking cheap, the money should return to the market and drive prices back up.

Millionaire Money Habit: As a long-term accumulator of wealth, your main goal should be to not lose money with your investments. If interest rates continue to come down, your cash investments will not be able to keep up with the rate of inflation. Consider putting your cash investments in another investment vehicle that can offer a greater return.

Before dumping all of your money in financials, realize we are talking about your investment funds, not your savings and emergency funds. Do not stray from your investment strategy, continue to diversify, always keep some cash on the sidelines and always do your due diligence before jumping head first into an investment.

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Posted by Ryan on November 29th, 2007 in Taxes and Fees

Common, Everyday Tax Deductions

In Part 1 of this series, we looked at 7 year-end tax tips to boost your tax deductions and lower your taxable income. In Part 2 we are going to list the common, everyday expenses that can be itemized in order to reduce the taxes you have to pay Uncle Sam. When you do your taxes, you can choose the standard deduction or choose to itemize your deductions, whichever is more advantageous, in order to reduce your taxable income. The standard deduction for 2007 is as follows:

Single: $5,35
Head of Household: $7,850
Married Filing Joint: $10,700
Married Filing Separately: $5,350
Qualifying Widow/Widower: $10,70
Dependent: $850-$5,350
Additional Amount if Blind: $1,050
Additional Amount if age 65 or older: $1,050

If your itemized deductions are greater then the amount for your category above, you will want to itemize your deductions, provided that you can back up expenses with receipts. Note that itemized deductions are limited to certain income levels. The value of your itemized deductions will “phase out” once your taxable income reaches:

Single: $156,40
Head of Household: $156,400
Married Filing Jointly: $156,400
Married Filing Separately: $78,200
Qualifying Widow/Widower: $156,400

The list below outlines some of the common, everyday expenses that are often overlooked as tax deductible expenses. Complete details and eligibility can be found here: http://www.irs.gov/faqs/faq3.html

Gifts and Charitable Contributions:

• Cash contributions to charities and churches
• The fair market value of property or non-cash donations to charities and churches

Interest & Investments and Transactions:

• Legal fees related to producing or collecting taxable income or getting tax advice
• Hobby expenses, but generally not more than hobby income
• Gambling losses up to the amount of gambling winnings
• Fees to collect interest and dividends
• Investment fees and expenses
• Student loan interest
• Tax preparation fees
• Safe deposit box rental

Medical, Nursing and Home Care:

• Medical, dental, prescription drugs, and other health care costs
• Real Estate & Personal Property
• Depreciation on home computers used for investments
• Real estate (property) taxes
• Interest paid on a home mortgage
• Personal property taxes (such as motor vehicle registration fees)
• State and local income taxes or state and local sales taxes
• Losses because of theft or casualty on personal property and income producing property

Education and Job Related Expenses:

• Job search expenses in your present occupation, including: resume paper, postage and travel expenses, such as meals and lodging when staying away from home, taxi fares, laundry expenses
• Depreciation on a computer or cell phone your employer requires you to use in your work
• Home office or part of your home used regularly and exclusively in your work
• Subscriptions to professional journals and trade magazines related to your work
• Tools, supplies and equipment used in your work
• Travel, transportation, entertainment, and gift expenses related to your work
• Work clothes and uniforms if required and not suitable for everyday use
• Moving expenses for a new job
• Work-related education
• Dues to professional societies
• Passport for a business trip
• Union dues and expenses
• Legal fees related to your job

Millionaire Money Habit: Go through your receipts and credit card statements to collect records of expenses that qualify for deductions. Turbo Tax has a deduction finder calculator to help you find some of these deductions. If you think you will be itemizing expenses this year, rather than taking the standard deduction, look for any 2008 expenses that can be itemized that you can pay in 2007 to increase your deductions. Your January mortgage payment, for example, would qualify.

So far we have looked at 7 year-end tax tips to boost your tax deductions in Part 1, and discussed expenses that can be itemized to take full advantage of lowering your 2007 income taxes. In Part 3 we will discuss what you can do throughout 2008 to prepare to pay even lower taxes next year.

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