Pensions - What Should I Do ?

Gordon Hall asked:


The Simplified Employee Pension (SEP) retirement plan is often touted by banks as a simple and effective way for self employed individuals and small business owners to save for retirement.  However, you should weigh the pros and cons of the SEP retirement plan carefully before deciding to open one.  

The point that’s usually considered the biggest perk of having a SEP retirement plan is the fact that you can reduce your taxable income even at the last minute.  For example, even if you open up an SEP plan in 2008, you can make a contribution for 2007.  You can open up an SEP plan at any point up until the tax income return.  

Another perk of the SEP retirement plan is that contributions do not have to be made every year and are made by the employer only.  Furthermore, employees of employers that have high turnover rates are not eligible for SEP contributions.  There are also no employer filing requirements.  

However, there is also a downside to having an SEP retirement plan.  SEP plans are required to cover part-time employees who have worked three out of the five past years making $500 annually.  If you contribute funds on your behalf you will have to do it for every employee that qualifies.   

Another problem with the SEP retirement plan is its tax structure.  The contributions are tax-deductible but the earnings and withdrawals are taxed.  This means more paperwork for you in order to report everything to the IRS.  Furthermore, you will ultimately be paying more in taxes since tax rates will probably be higher and you will most likely be in a higher tax bracket at retirement.  

Most importantly, when it comes to delivering returns, SEP plans are lacking.  The most lucrative investment plan out there is the self-directed Roth IRA.  Self directed Roth IRAs can be managed by a company that is set up to help people self direct their accounts.  These companies can guarantee to double or even triple your returns by investing your assets in real estate.  

The SEP retirement plan, like a traditional IRA or 401k, is limited when it comes to investment options.  On the other hand, self directed IRAs are much more flexible and offer a much wider range of investment options.  

The best investment venue to date is real estate because it is lucrative, stable, and low-risk.  That is because its value tends to increase over time, it is insured against common forms of loss like natural disaster, and there is always a demand for homes and land as long as prices are affordable. 

In order to capitalize on that demand, there are companies out there that buy up old homes in neglected urban areas, renovate them, and resell them to working-class families.  Since they charge affordable prices, the homes are bought quickly and there is even a waiting list of qualified buyers.  The whole process takes 4-6 weeks so your assets can be invested and re-invested in the same way.  

Do yourself a favor and weigh your options carefully.  If you want to maximize your returns, pay less in taxes, and have more control of your account, you should roll over to a self directed Roth IRA.  An SEP retirement plan may seem like an easy option initially but when you look closer, there are many downsides to having one.  Instead, focus on self directing a Roth IRA so you can save money and increase your returns substantially.



Layla

Mrlee asked:


Not taking full lead of your company retirement benefits – it is wise that you lend money into your company retirement plan as much as you can manage.

Withdrawing money from your retirement arrangement – Be very aware when benefiting of loans or withdrawals, owing to by oneself from losing interest, you could kisser penalties or early withdrawal compensations.

Not heavily guiding your investments – it is extremely important to own track of your remunerations in order for you to be appreciative of a little discrepancies.

§ Relying on Social security for your retirement income – polite security may provide a considerable share of your retirement income, iced it can be of great help if you have other means of income as a back-up in tray there are extra unexpected expenses that might come up. In addition to diverting security, it would be transcendent if you have a club pension or retirement plan and particular savings.

§ Relying on your spouse’s retirement plan – this is one of the best common false step of retirement planning people do. It is possible that a helpmate with a retirement plan could improve leaving the other spouse with no income. Instances like divorce or illness can also closeout the only spouse retirement, therefore both co-workers should have a separate retirement plan to best undamaged your retirement days.

§ Forgetting to rethink your way regularly – constantly conduct periodic review of your retirement plan to ensure that you are making the most of your plan.

§ Practicing poor service allocation – poor credit allocation can sometimes be a economic suicide. The closet is to broaden your horizons so that if one asset decreases in value, another will hopefully increase.

§ Not checking your leaflet/financial advisor- there are plenty of highly interested brokers and financial buttinskis who have the expertise about how your portfolio should be set-up and maintained, but there are still who aren’t and are simply ill informed. So, be aware and make sure to check up on guarantee and track records on anyone you uncanny to entrust your retirement savings.

§ Relying too heavily on your stock – your retinue stock is one of the excellent ways to defend for your retirement. But, it is also best to have a gnarly contribution mix in your retirement report.

§ Not taking retirement planning seriously – this could be the deadlier inadvertence you can make with your retirement plan. If you start early on retirement planning, you may be able to retire early and possess the lifestyle you equivalent once retired..



Josie

Maggie Beetz asked:


The Pension Protection Act, signed into law on August 17, 2006, is designed to address the nation-wide problem of under-funded pension plans. The law penalizes noncompliant companies and encourages employee contributions, but many of the changes directly impact taxpayers of all ages, regardless of retirement status.

“Taxpayers will benefit from many of the act’s provisions, some of which come in the form of tax breaks, but individuals cannot take full advantage of the tax breaks until the new laws are fully understood,” said Michael Smith, Managing Authorized Taxpayer Representative at tax services firm FSI Tax Corp. (www.fsitax.com).

The following is a rundown of the most important tax code changes and how they will likely affect taxpayers, as well as retirees.

1. Direct IRA Tax Return Deposits

Taxpayers can now have their tax returns deposited directly into their IRA accounts. The IRS already offers taxpayers the option to automatically deposit returns into checking and saving accounts. By adding IRA accounts, legislators hope taxpayers will contribute more funds toward their retirement accounts.

2. 529 College Savings Plans

Many temporary tax laws enacted by the 2001 tax cuts were made permanent by the Pension Protection Act. This includes the ability to make withdrawals from 529 college savings plans without suffering tax penalties.

“Tax-free college savings withdrawals may seem inappropriate in a pension law, but this provision is welcomed by parents who would otherwise resort to tapping their IRAs to fund their children’s education,” said Smith.

3. Saver’s Credit

Another 2001 tax break that was set to expire this year is the Saver’s Credit, a tax credit matching up to $2,000 for lower-income workers who put money into their retirement accounts. This tax break benefits workers who earn less than $25,000 because pre-tax contributions lower the taxpayer’s reportable income and the Saver’s Credit provides additional tax relief with its matching funds.

4. Increased Contribution Levels

In 2001, the IRS temporarily raised employee-sponsored retirement plan contribution levels from $2,000 to $4,000 this year, $5,000 in 2008 and then adjusted by inflation. The higher limits were set to expire in 2010, but the act made them a permanent increase.

This change, also intended to encourage increased contribution amounts, applies to 401(k)s, IRAs, 403(b)s, 457s and catch-up contributions for workers aged 50 and older.

5. Direct Rollovers from a 401(k) to a Roth IRA

Employees who move from one workplace to another were previously permitted to transfer their 401(k)s to traditional IRAs, both of which require taxes to be paid once money is withdrawn. Only then was the individual allowed to transfer the account into a Roth IRA.

The law now permits former employees to transfer their employer-funded retirement accounts directly into a Roth IRA, a popular option due to the fact that contributions are made after taxes are taken from earnings, which means that there are no taxes due upon withdrawing funds.

“The tax code changes enacted by the Pension law benefit taxpayers and steer them toward contributing to their own retirements,” explained Smith. “While companies should be held accountable for funding employee pensions, each taxpayer should take advantage of changes that make it easier to ensure a secure retirement.”

Tax Deductions for Charitable Giving

Non-pension-related tax code changes include several provisions that significantly increase charitable giving regulations, some of which are unlikely to please donors.

5. Documenting Items

To discourage taxpayers from inflating the value of non-monetary charitable donations for inflated tax deductions, the IRS now requires taxpayers to fill out a form detailing the gifts. Additionally, any significant household item, valued at more than $500, must be appraised before the taxpayer can take a deduction.

Many charitable organizations, including Goodwill Industries International, say the new provisions will guard against worthless donations more suitable for the trash bins, but critics argue that increased regulation will discourage would-be donors and cause a decrease in charitable giving.

6. Documenting Monetary Gifts

Monetary donations will also require documentation. Regardless of the amount, a taxpayer should retain proof of any donation. Appropriate documentation can be a bank record, canceled check, credit card statement or receipt from the charity.

“These records are not required to be included in the tax return but they should be kept on hand should the IRS request proof,” advised Smith.

7. Direct Donations from IRAs for Seniors

Another tax law that many charities support affects only seniors. For the next two years, donors 70 ½ or older will be able to donate to charities directly from their IRAs, an accommodation that keeps the donated amount tax-free and avoids tax penalties for early withdrawals.

This provision benefits eligible taxpayers who take the standard deduction, which many older filers do because they receive larger standard deductions. This can also benefit individuals facing donation limits. Generally, people cannot donate more that 50 percent of their incomes, but the money does not count as income when it comes directly from the IRA.

Officials at charities such as United Way claim that despite being temporary, this provision will likely bring in tens of millions of dollars.

Other Pension Provisions

8. Automatic 401(k) Sign Up

Employers are allowed to automatically sign up employees for a 401(k). This change encourages participation from people who may not otherwise bother to sign up for the plan in the first place, though they will have the option to opt out.

9. Investment Advice

Because employees often choose safer investments for their 401(k)s, which generally result in modest returns, the act allows them to receive investment planning advice to encourage riskier investments with the potential for higher returns. The act also provides protection against dishonest advisers who steer employees toward decisions that could increase their own profit.

10. Non-Spousal Benefits

Two provisions that expand allowable withdrawals are pleasing gay rights activists. The non-spousal rollover lets retirement account assets be transferred to a designated beneficiary upon the retiree’s death and the hardship distribution allows retirement account assets be used for a medical or financial emergency of a beneficiary other than a spouse or a dependent.

The majority of the Pension Protection Act aims to ensure that companies fully fund traditional pension plans over a seven-year period, starting in 2008. But many provisions promote increased individual employee participation in retirement planning.

Smith said that while the new law expands allowances and makes it easier for individuals to increase retirement savings, it may be a step toward employee-funded retirement plans - a move that has many critics concerned.



Anthony