Missing out on Free Money?

Are you making the most of the employer match in your 401k plan?  Getting the full employer match in your retirement plan is one of the closest things to free money in our economy.  Forbes recently ran an article titled “The Big 401(k) Match Mistake,” that highlighted an easy to miss provision in many retirement plans that can prevent high income earners from receiving the full match on their retirement contributions.  This can happen when plan contributions are “front-loaded” in the first few months of the year due to a high percentage contribution coupled with bonus income that causes you to hit the contribution limit early.

In theory this sounds like a great plan-max out your retirement plan early in the year, than you don’t have to worry about it until next year.  The problem occurs if your plan matches your contribution each pay period; this can leave substantial dollars out of your account vs. extending the contributions throughout the entire year.

Now is a great time to check your plan provisions to make sure you are getting the most out of your employer match, before spring bonuses are paid.  While you’re at it, make sure you are contributing as much as possible; the limit for 2012 is $17,000.

Photo credit: 401k

Relenting to the calls from his opponents for transparency, he recently released his tax returns.  Not only does the information shine a light on Mr. Romney, it puts the issue of fairness in our tax system back onto the front page.

The Washington Post: Mitt Romney’s tax returns shed some light on his investment wealth

Some of the highlights from the returns:

• 550 – Total pages filed for 2010
• $42.6 million – Amount of reported income for 2009 and 2010
• 13.9% – His effective tax rate
• Zero – Amount of wages earned

Mr. Romney’s tax return is being criticized as an example of how our tax system is rigged to favor those who control capital (wealth).  Much of the income that was reported on his return was in the form of something called carried interest.

This income was from profits Mr. Romney received through his participation in Bain Capital, a private equity firm that he helped co-found in the 1990s.  There is plenty of criticism pointed at how private equity generates profits – most notably from his Republican opponents – but also at how this profit is taxed.

There is a special provision in the tax code that allows for capital gains treatment for carried interest.  This means that Mr. Romney’s tax rate is capped at 15% on this income instead of 35%, if it were treated as ordinary income (as many critics say it should be).

It’s getting harder for those in the private equity industry and their Congressional allies to argue not only that this is good tax policy, but that it is fair.  Most Americans hold their investments in tax deferred accounts which they funded through payroll contributions. When withdrawals are taken from these assets they are taxed at ordinary rates.  No loophole for the middle class here.

Income disparity is at an all time high and the anger directed at the wealthy is being stoked yet again. Higher tax rates for the Mitt Romney’s in this country are being pushed by the President and even by some of the wealthy themselves.

Warren Buffett points to the fact that his secretary pays taxes at higher rates than he does because most of her income is derived from wage compensation while his comes overwhelmingly from investments.

The decade of the 2000s saw overall tax rates decline while GDP growth rates fell.  We do believe that tax rates are going to rise, especially for those whose incomes are derived from investment sources.

Our long-term issues of entitlement funding, in particular healthcare, will likely require higher tax revenues even though some of our current political leaders lack the ability (or the nerve) to face this reality.

Photo credit: Gage Skidmore

Looking forward for 2012 contributions, some contribution limits for this year have increased.  This does not include the limits for the Roth and Traditional IRAs, but does include the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

If you will be celebrating your 50th birthday this year, it is also a good time to make sure that your HR Department enables the ‘catch-up’ provision on your employer sponsored plan. This will help you meet the maximum contribution limits throughout the year.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Still unsure how much (in which accounts) you should be contributing to? An updated financial plan may be your first step in understanding how to take advantage of the best investment accounts for your situation.

Need investment management and an ongoing, evolving financial plan? Our wealth management service monitors your income and determines each year how much you should be contributing to each of these investment accounts that are applicable to your eligibility.  We also review your income tax and estate picture, which may provide opportunities for tax savings.

If you are interested in either of these services, please contact us.

One of the ways you can check to see how a charity is spending their money is to look them up online using Charity Navigator.  While the caller was on the line I went to Charity Navigator to look them up.

I could not find them and was told by the caller that they don’t submit information for rating since it costs money and since Woman 2 Woman is a non-profit they try to save money where they can.

I then went to the Woman 2 Woman website and found their audited financial statement for 2009-2010.  Turns out that in 2010 they had revenue of nearly $6.5 million, and that they spent $6.2 million on fundraising!  After an additional $60,000 in Management and General expenses, they spent only $201,000 for their stated mission.

That means if I had donated $100 to them in 2010, they would have only used three dollars to help breast cancer patients.  Needless to say they will not be receiving any donations from me.

If you get a call from a charity, do some homework and you can make sure that your money will get used for the purpose you care about.

Shocking

A central discussion in 2012 will be the possibility of inflationary and deflationary economic outcomes around the world.  Several of the deflationary threats that made news in 2011 continue to raise significant questions as we move in to 2012.

Potential European Breakup

Uncertainty surrounding debt situations in Europe will continue to drive market movements as the debate about the balance of payments between Germany and the rest of Europe drags on.  Germany could be a bigger problem than Greece and other debt-laden nations, as they insist on running a trade surplus and wanting everyone to cut government budgets when Europe is in a recession.  This makes it very difficult for the weak countries to improve their budget deficits.

China’s Real Estate Bubble

China is still facing the unwinding of their residential housing bubble and the effect this will have on their longer-term growth prospects.  They do have room to adjust monetarily by lowering interest rates further, but their drive for continued modernization vs. the inevitable real estate slowdown may cause political unrest.

US Elections

Another wild card in 2012 will be the US elections. Markets like certainty, so if the outcomes of the elections becomes more uncertain as the campaigns heat up, volatility may pick up.  Of course as the outcomes become more certain, volatility is likely to decrease.

Iran

Relations with Iran are becoming more and more strained.  The questions surrounding their nuclear programs and declining oil production due to sanctions, have created threats of a shutdown of the Strait of Hormuz, which helps transport one-fifth of the world’s oil supply.  If tensions continue to rise, the potential for economic disruption would also increase.

We understand that when fear is high, like now, long term investment risk for stocks is actually low.   This is coupled with the potential rise in residential construction that we’ve been discussing which should also improve the jobs picture.  Uncertain issues like the ones mentioned above could still give life to a global recession but, if the solutions to these problematic situations are just a little better than expected, the markets could respond with a continued melt-up rather than a melt-down.

While many of us do not consider budgeting to be even remotely exciting, it is one of the most important things we can do to understand where our money goes and figure out ways to either spend less, save more, and/or plan for goals throughout the year.

Whether you have been tracking your budget for a few months or for a few years, now is the perfect time to re-examine it. Take some time to align your monthly estimated budget and actual spending.  Are your monthly budgets higher than your targeted annual expense number? Are you really spending as much as you anticipated on items such as transportation or utility costs?  You may find that some of your targets need to be readjusted, either increased or decreased, depending on changes in your lifestyle. 

It may also help to take a look at your current expense-tracking categories and see if you can condense any to better capture the broader picture. We recommend tracking wide-ranging categories such as ‘Food and Dining’ and ‘Utilities’ rather than breaking down ‘Fast Food’ and ‘Coffee Shops’ or ‘Cell Phone’ and ‘Internet.’ In the long run, your total regular expenses are what is most important.

We understand that everyone’s situation is unique and some households require more categories than others.  Some households may want to trim expenses, and separating out the smaller categories for a short amount of time can help you see where money is being spent.  If you are interested in reducing expenses in one particular area, try setting both a timeline and dollar-savings goal, and then, consistently monitor your progress. Once your goal has been achieved, readjust your budgeting categories to see the big picture again.

The start of the New Year is also a great time to update (or begin) a financial plan. For our current clients, we are more than happy to assist you with both setting up and monitoring Mint.com accounts.  Contact us to learn more about the ways in which we can to help you not only track your expenses, but also help plan for your financial goals along the way.

Financial Symmetry has covered several current events on our blog throughout 2011, and here are what we think the Top 10 Stories of the Year have been:

(Click the plus (+) symbol to expand the story.)

Are you ready for the New Year?

Consider taking capital gains

For taxpayers in the 10% and 15% brackets, the capital gains rate is currently 0%.  This is scheduled to last through the 2012 tax year.  Maxing out your pre-tax retirement contributions or a period of unemployment may allow even individuals with typically high incomes to take advantage of this provision.  If you have significant unrealized capital gains and low income this year, this strategy might be right for you.

Plan contribution rates for 2012

The New Year is a great time to increase your retirement plan contributions.  In 2012 the limit for 401k contributions will rise to $17,000.  If you are 50 or older you will be able to contribute an additional $5500 as a catch-up.  The limit for Roth and Traditional IRAs will stay the same at $5k/year with an additional $1k catch-up.  You also have until April 15^th, 2012 to make your IRA contribution for the 2011 tax year.

Make Catch –up contributions to your retirement accounts

If you are 50 or older you can contribute an additional $5500/year to your 401k as a catch-up.  If you are over 50 and have already hit the $16,500 limit for 2011, you may still be able to contribute more from your last paycheck of the year.  Contact your HR department to set this up.

Take your RMD

Once you turn age 70.5 the IRS requires that you begin withdrawing money from your retirement accounts.  The penalty of not taking your mandatory required distribution from your IRA, is one of the highest the IRS imposes. Failing to take your Required Minimum Distribution before the end of the year will result in a 50% penalty of the amount that was not withdrawn in addition to the tax due.  To make your RMD before year end, contact your plan provider.

Compare actual spending to your budget

Most of us have a tendency to go on a spending binge this time of year.  The price competition between retailers and constant sales are a shopper’s dream.  Now is a great time to revisit those saving and expense targets set earlier in the year and compare your progress.  For help setting targets and monitoring your progress please contact us to develop a financial plan.

A recent study by the Congressional Budget Office shows that the wealthiest U.S. income households have garnered a disproportionately large portion of total income growth over the last thirty years.  In the last three decades, the top 1% of U.S. earners have seen their slice of the country’s income pie double from 10.5% to over 21%.  Their real (inflation adjusted) after-tax incomes rose by 275% while the bottom 20% of income households have experienced quite a different reality as their real after-tax incomes grew by only 18 percent.  As a result, the income gap between the wealthiest and poorest Americans has grown to a level not seen since the 1920’s.

How did the Gap Become so Wide?

Much of this widening income gap is believed to have been caused to a large extent by technological advancement and to a lesser extent globalization. As this study points out, it’s imperative for policy makers to increase access to education and training in order that worker skills meet the demand from today’s rapidly changing world.

Lower skilled U.S. workers are at a disadvantage because they have faced a dual threat to their livelihoods.  Yes cheap foreign labor has contributed to U.S. job losses, but automation has been a bigger factor.

Currently much of the financial benefits from technology gains are showing up in corporate bottom lines.  At some point the benefits from technology gains, however, have to be spread further down to workers.  Henry Ford had a goal to build a car that the average American worker could afford while paying his own workers a wage that would allow them to buy the cars that they were producing.  Through his determination and ingenuity, the Model T rolled off of the first modern industrial assembly line in 1908.  The American economy and the life of the average worker were forever changed.

Corporate and political leaders need to work together to leverage advancement in technologies so that the lower and middle of the income spectrum have more of an opportunity to participate.

We will continue this discussion of factors that we think have played a role in creating the large income gap as well as some possible solutions for restoring a healthier balance in our next post on this topic.