To find your 401k maximum contribution for 2010 and more see
401K Contribution Limits
To make the most of your 401K contributions, you need to know first how much you can contribute. Usually that is based on a vesting schedule. See your employer about when you “vest”. 401K contributions are also limited. You can contribute a certain amount based on a percentage of salary. The same is true of any matching contributions. They are based on a percentage of salary. For example, an employer may match each dollar you contribute to your 401k plan up to 3% of your salary.
I am a big believer in NOT getting a tax refund. A tax refund is giving the US government a tax-free loan. You can get that money on a monthly basis to spend, save, or invest to build wealth. Many people use a tax refund as a forced savings. Big mistake! If you understand the time value of money, you will know that it is better to get the money in your hands now rather than later.
It’s not an easy calculation, but here is a tool you can use from the IRS to decide how many withholding exemptions you need to get more or less tax taken out of your check.
For a high tax state such as California where I live, we may be getting no state tax refund at all due to the budget problems. See this:
“the CA State Controller announced on Friday, January 16, 2009, that because of the state’s cash shortfall he will have to delay refunds for 30 days starting February 1, 2009 for Personal Income Tax and Business Entity taxpayers. Refund payments will resume when the State Controller indicates there is enough cash available to make refund payments.“
Whether you are an individual or business, you need to keep track of the taxes you pay and the taxes you owe. One of the 7 Steps to Creating your own Financial Plan is tax planning, and you can review that portion in step #7 tax planning. You will find tips on tax deferral, tax, credits, and tax deductions.
There have been some significant changes in the tax law that can change the way you make your holiday charitable contributions.
First – if you or your parents or grandparents are over age 70 ½, you have a one time opportunity (which expires this December 31) to rollover funds up to a maximum of $100,000 from an IRA directly to a charity without tax. This rollover can include a required minimum distribution. The results? No deduction for the charity contribution but even better – no taxable income on the distribution, and a reduction of assets for estate tax purposes. I hope Congress extends this wonderful benefit into 2008!
Second – There are new record-keeping requirements for cash contributions. According to the IRS – you cannot deduct a cash contribution, regardless of the amount, unless you keep a bank record of the contribution (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. This means no more spare change in the bucket for Salvation Army. Those buckets will have to be filled with checks in order to be deducted.
There’s no question about it. Americans are a giving people. But this year charitable contributions are down significantly according to a Wall Street Journal On-line/Harris interactive poll. Only 17% say they contribute for the tax-write-off while only 55% believe their contribution will make an impact.
Americans are starting to hold their charities to a higher standard. A high percentage felt that charitable organizations waste money, pay their directors too much, and don’t do a very good job of running their programs and services.
People like Bono, Bill & Melinda Gates, and Warren Buffet are making their charities more transparent about their use of funds and the impact they have had on reducing poverty, mortality rates and increasing education. We should demand more accountability, too. (See www.give.org)
Coaching Question – Do you see the effectiveness of your charitable contributions?
Fall is such a wonderful time of year. I love the local harvest festivals and the earthy colors of the season. It is also the time of year when Financial Advisors think of tax harvesting which is a term that they use when reviewing portfolios for tax efficiency and thinking about how to offset gains and losses. Let’s review how that works. A long term capital gain is the amount that you have earned over the amount invested for more than a year. If that investment is sold, then the capital gain portion is taxed at 15% (federal tax) maximum – not your tax bracket. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is limited to $3,000, (or $1,500 if you are married filing separately). If your net capital loss is more than this limit, you can carry the loss forward to later years.
When an Advisor reviews your asset allocation, they will keep these tax rules in mind. First of all it is in the client’s best interest to review the asset allocation once a year and second, it is in the client’s best interest to keep the client’s tax liability as low as possible. After all, it’s not what you earn but what you keep that counts. That is how wealth is accumulated.
If your portfolio has active funds, then you will get a statement from the fund estimating what the capital gain distribution will be. Usually you will get this at the very end of the year when it’s too late to do anything about it. This is just another reason why I like passive funds and ETFs (exchange traded funds). However, if you do own active funds outside of retirement plans, you should know how tax efficient that fund is. Find out how yours is doing with the Lipper’s tax – efficiency rating system (www.LipperWeb.com). This is important since you may not sell the fund that year but get a whooping tax bill on a large capital gain distribution from them – a bad surprise for sure.
A good strategy that I highly recommend is to keep all your dividend paying funds (bonds and large companies) in retirement plans and keep your tax efficient funds in taxable accounts.
Coaching Question – How can you make your portfolio more tax efficient?
