YodZiaN

Let?s look at a recent client we worked with, James, a
45 year old dentist who had ?500 per month to invest.

James was confident that he could invest this money
until his retirement at age 60, in 15 years time.
He has a mixture of PEPs and ISAs, with an NHS Pension
and a buy to let property.

Looking at this as one investment against another, we
need to look at a like on like projection. So we will
use a growth figure of 6% net of charges for both
investments.

Because of the tax relief available for James at his
highest rate (40%), the amount he can invest into a
pension fund is ?835 pm compared to the ?500 pm to an
ISA. Using projections of the future fund values over
15 years we get figures of:

Pension – ?238,810
ISA – ?143,000

It appears there is no contest, however, let?s look
at the figures a little closer.

The ISA fund is all available as tax free cash, whereas
the Pension fund rules say a maximum of 25% of the fund
can be taken as tax free cash which is ?59,702.

So if we calculate ?143,000 minus ?59,702 = ?83,297,
this is the amount of tax free cash we have over and
above the Pension route. The remaining ?179,107 in the
Pension fund has to be used to buy a pension called an
annuity. So the question now is what pension amounts
could be available for James?

Taking an average example and using today?s rates, a
level pension of ?9,117 per annum would be achievable.
However, will James be a higher or lower rate tax payer
in retirement? This changes the picture somewhat, as the
following after tax pensions would be applicable:

Higher rate tax payer – ?5,470 per annum
Lower rate tax payer – ?7,111 per annum

So to compare this to the ISA, we need to see how many
years the pension needs to pay out to reach the ?83,297
value of the ISA fund, allowing for growth on the ISA
fund at the same 6%, net of charges.

The answer is 17 years for the basic rate payer and 30
years for the higher rate payer! Not only is this is
a massive difference between the two, but it also helps
towards the decision whether to invest into a pension
tax wrapper or an ISA.

Other considerations

-We have ignored any ?pension drawdown? option

-The amounts you can contribute to pensions is currently far more generous than that available to ISAs

-Annuity rates on pensions may improve or reduce in the Read more…

What are your dreams? What is your focus? You can not travel where you can not ?see? the road.

Do you long for a beach condo? The chance to travel? A private cabin in the mountains?

Please allow yourself to keep dreaming and keep building – building your life around dreams you can see clearly and almost taste.

IRA building blocks can help fund your retirement dreams.

The Roth IRA: With this block you will pay taxes now and never pay again.

You contribute up to $5,000, or 100% of your earned income (whichever is less) annually, after taxes, and your investment earnings accumulate tax-free.*

Then you can:

Obviously, nobody asked the marketing guys before coming up with this one. Who in the world thought up the name “non-qualified deferred compensation?” Oh, it’s descriptive alright. But who wants anything “non-qualified?” Do you want a “non-qualified” doctor, lawyer, or accountant? What’s worse is deferring compensation. How many people want to work today and get paid in five years? The problem is, non-qualified deferred compensation is a great idea; it just has a lousy name.

Non-qualified deferred compensation (NQDC) is a powerful retirement planning tool, particularly for owners of closely held corporations (for purposes of this article, I’m only going to deal with “C” corporations). NQDC plans are not qualified for two things; some of the income tax benefits afforded qualified retirement plans and the employee protection provisions of the Employee Retirement Income Security Act (ERISA). What NQDC plans do offer is flexibility. Great gobs of flexibility. Flexibility is something qualified plans, after decades of Congressional tinkering, lack. The loss of some tax benefits and ERISA provisions may seem a very small price to pay when you consider the many benefits of NQDC plans.

A NQDC plan is a written contract between the corporate employer and the employee. The contract covers employment and compensation that will be provided in the future. The NQDC agreement gives to the employee the employer’s unsecured promise to pay some future benefit in exchange for services today. The promised future benefit may be in one of three general forms. Some NQDC plans resemble defined benefit plans in that they promise to pay the employee a fixed dollar amount or fixed percentage of salary for a period of time after retirement. Another type of NQDC resembles a defined contribution plan. A fixed amount goes into the employee’s “account” each year, sometimes through voluntary salary deferrals, and the employee is entitled to the balance of the account at retirement. The final type of NQDC plan provides a death benefit to the employee’s designated beneficiary.

The key benefit with NQDC is flexibility. With NQDC plans, the employer Read more…

When are Social Security checks potentially loans and not benefits? Why, when you have “excess earnings” of course. In today’s economy, many senior citizens still work during their “retirement” either because they want to or, all too often, because they must to make ends meet. Retirees who want to work as well as collect social security retirement benefits must plan their compensation carefully if they want to avoid losing some or all of their social security benefits.

In order to collect social security “old age” benefits, you must be “retired.” Congress has reasoned that if you earn more than a specified amount, you are not “retired” and, therefore, are subject to having some or all of your benefits eliminated. Congress does allow you some earnings before your benefits are jeopardized.

The amount of allowable earnings depends on your age. If you are over 65, there is no limit on the amount you may earn and still collect your full benefit. If you are at least 62, but younger than 65, you may earn up to $12,480 in 2006 before your benefits are affected. The earnings limit is adjusted each year for inflation. If you earn in excess of the limit, you must repay some or, potentially, all of the benefits you receive. For every $2 you earn over the $12,480 limit, you must give up $1 of benefits.

A special rule applies in the year in which you retire. In the initial retirement year, no matter how much is earned for the year, no benefits will be lost for any month in which you earn $1,040 (1/12 of $12,480) or less.

For purposes of the retirement test, “earnings” are defined as “wages” earned as an employee or the “net earnings” of a self-employed person. The earnings must result from work performed after retirement. “In kind” Read more…

Despite the new tax rate reductions of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the top marginal tax bracket for many retirees is a whopping 46.3%. Why? Because Social Security benefits are subject to income tax. Those affected are Social Security recipients who have the good fortune (misfortune?) to be subject to both the 25% income tax bracket and the 85% inclusion rate for Social Security benefits.

Here’s how it works. First, you must understand how Social Security benefits are taxed. The income tax formula begins with the calculation of combined income. For all practical purposes, combined income equals adjusted gross income (not including Social Security), plus municipal income, plus one half of the taxpayer’s Social Security benefit.

So far, so good. If a married couple?s income is under $32,000 ($25,000 for a single taxpayer), Social Security benefits are not taxable. If combined income is between $32,000 and $44,000 (or $25,000 and $34,000 for a single person), the taxable amount of Social Security equals the lesser of one half of Social Security benefits or one half of the difference between combined income and $32,000 ($25,000 if single). Up until now, it?s not too complicated.

Here’s where the real fun begins. If the taxpayers’ combined income is over $44,000 ($34,000 if single), the taxable amount of Social Security equals: the lesser of (1) 85% of the benefit, or (2) the sum of 85% of combined income over $44,000 ($34,000 if single) plus the lesser of $6,000 ($4,500 if single) or the amount of Social Security taxable under the old rules. Nobody ever said new tax laws created tax simplification.

Here’s how we come up with that 46.3% bracket. In order to illustrate an increase in the marginal tax, you have to compute taxable income. Taxable income, as we all know, is net of allowable deductions and exemptions. The standard deduction (that many retired people claim), personal exemptions and the tax brackets are all adjusted annually for inflation.

Assume Hank is over 65, files single, utilizes the standard deduction, and has total Read more…

Financial planning is really life planning. Choosing a home, particularly a retirement home, involves many factors. With state and local taxes on the rise, retirees should look closely at tax matters when formulating their retirement financial plan.

Retirees who plan on continuing to work in their “golden years” should know that state taxation of such income varies widely. Some states give retirees favored treatment on earned income, some treat retired seniors like everyone else, and some impose no tax at all on earned income. Taxation of investment income shows nearly as much variation between states. Retirees in a new domicile must also watch out for unexpected municipal income taxes.

Income from government, military, private pension and other retirement plans is growing increasingly important to the survival of retired individuals. Some states exempt all such pension income from taxation, while others exempt certain types or place limits on non-taxable pension income. Some states even tax former residents on retirement plan withdrawals, creating the possibility of paying income tax in two states. Some states follow federal tax formulas for taxation of Social Security benefits, others have their own formulas, and some tax benefits not at all.

Sales and property taxes must also be considered. Again, some states offer property tax advantages to retired seniors while others provide homestead exemptions. Retirees should consider sales taxes when estimating their retirement budget for such items as Read more…

If you are about to retire or change jobs, or if your employer is terminating the company retirement plan, you may be eligible to receive a “lump sum distribution” as defined in the Internal Revenue Code. Such a distribution may be substantial and may represent the cornerstone of your retirement security. So it is important to consider your options carefully before making a decision regarding distributions.

Basically, you are faced with two main options. Should you take a direct distribution and pay your taxes now? Or should you roll your distribution over into a traditional Individual Retirement Account (IRA)?

If you decide not to roll the distribution over into a traditional IRA, you must pay tax on the distribution in the year you receive it. You will, of course, be able to invest the remainder as you please. The main benefit of paying taxes on your distribution now is that you may be eligible for special tax treatment. If you were born before 1936, you may be eligible for ten-year tax-averaging on your lump sum distribution. Or, if your distribution will include shares of your employer?s stock, a portion of your distribution may be eligible for the new lower capital gains tax treatment. If either of these situations exists, you may be able to pay a lower tax rate than usual on your distribution. If not, your distribution may be taxed at your ordinary income tax rate so you may want to consider your second option.

Your second option is to roll the distribution over into a traditional IRA. This alternative assures that assets will continue to enjoy tax-deferred growth to provide for your retirement. Under current IRS regulations, you need not begin taking distributions from your traditional IRA until you reach age 70 1/2.

Here are some facts to keep in mind when faced with the distribution decision.

? Only 60 days are permitted between the receipt of your lump sum distribution and Read more…

Qualified retirement plans and individual retirement accounts (IRAs) are great vehicles to take advantage of tax-deferred growth potential and save for retirement. When an individual eventually decides to tap into his or her retirement fund, withdrawals from these plans are subject to regular income taxes. There’s one catch, however, for people who are under 59 1/2 years old. They will pay an additional 10 percent tax for premature distributions, in addition to the regular income tax, unless they can fit within one of the exceptions to this penalty tax.

Of the exceptions to the 10 percent premature distribution tax, all but two provide no real planning opportunities. Most are designed to relieve the burden imposed by a death, disability, serious illness, education costs, first-time home purchase or divorce. The two other exceptions that do allow taxpayers to access their retirement funds without the penalty tax deserve closer examination.

The first exception applies only to distributions from qualified retirement plans like profit sharing, 401(k), pension and certain other employer sponsored plans. Under this exception, a taxpayer who has “separated from service” (i.e. they have retired, quit or been laid off) after attaining age 55 may withdraw any amount from his or her employer’s plan free of the 10 percent penalty tax.

This exception to the 10 percent penalty rule allows for the greatest flexibility and is very beneficial for many early retirees. It can even be utilized if the taxpayer has left the employ of one employer and makes the withdrawal from that first employer’s plan while working as an employee of a second company. For some, it’s a good reason to leave their retirement plan balances with their former employer since withdrawals from IRAs (even if the taxpayer is over 55 and not working) will not qualify for this exception.

There are, however, disadvantages to this exception. First, former employees are at the mercy of their former employers with respect to their withdrawal rights from the plan. Employer sponsored plans can have a wide variety of withdrawal Read more…

Think Ritch NO, my spell check is not broken. You should always be thinking richly, and occasionally you should visit the archived newsletter section of the invest-org-au website. There you will find a wealth of information, ramblings and also be able to ?back trade? to see how much money my previous ingenious tips would have made for you?

With the above, the ?Think RITCH? refers to a little acronym for ?Refund of Imputation Tax Credits?. Even if you are NOT a tax-payer, if you receive a pension or benefit that is tax-free, you can still get extra RITCH. If you do NOT submit a tax return, you can still lodge a single page RITC form to the Australian Tax Office and you can get FREE MONEY (a refund of your imputation tax credits. This is because Australian companies usually pay tax on their profits before they pay the shareholders. Often they pay more tax than you would, and as an owner, you can ask for this back).

Note that it is nobody?s job to tell you this? If you are entitled to get money back from the Australian Tax Office, do not expect them to call you and say ?Ah, we have $945 of your money, would you like it back?? It is NOT gonna happen. Do not wait for the ATO to call you. Do not expect your accountant or Financial Planner to call you and tell you (unless they are REALLY nice and good at their job).

It is up to you to ask for the money. To quote Jesus out of context, ?You have not, because you ask not?. Pensioners, self-funded retirees and any of those who earn less than $60 000 could definitely benefit from ownership of Australian shares and/or managed funds. Check with your accountant or call the ATO regarding RITC. Invest five minutes of your time and as little as $500 of your money to benefit twice (the investment could make you money, plus the ATO gives you money when you fill in the RITC form). Call your favourite investment adviser or Financial Planner to find out more. Keep Thinking RITCH?

Australia, you?re moving on up. Sometimes they report boring things on the financial news (OK, most of the time), and it seems boring because they use jargon and you don?t know what it means, or how it impacts you. National Accounts Surplus is up; is that good? Foreign Accounts Deficit is down; is that bad? Balance of Trade Figures ascendant; is that a rock band?

Ignoring the jargon of GDP and import/export figures, just try to think of Australia as a business. The business buys things, and sells things to other people. A business such as ?Beds R? Us? may buy timber for $20, turn it into a bed (paying the tradesman $10) and then sell the bed for $50. This means that they made a profit, and will probably make a larger profit the next year (because with more profits they can buy more timber and employ more staff), and they will probably continue to grow.

In the last decade, the cost of manufactured goods (such as cars, clothing, cameras, TVs and DVD players) has actually fallen; quite dramatically in the last few years. (Are you old enough to remember when the cheapest new car was around $30 000? Now they can make a brand new car for $13 000. Remember when digital cameras and DVDs were over a thousand dollars? Now they sell them in the grocery stores!)

Australia buys a lot of manufactured goods. Over the same timeframe, the cost of raw materials (coal, oil, gas, steel, wheat, cattle, aluminium and gold) has risen, again quite dramatically in the last few years.

Thinking again of Australia as a business that buys and sells things, that puts us in a good position. We are buying things for less, and selling things for more. China is paying more for our oil and cotton. We are paying the Chinese less for the toys and clothes. Australia is turning a profit!

For most of our short (two century) history, Australia has seen its ?terms of trade? (what we buy compared to what Read more…

Are you one of those who are forever on a hunt for quick tips on investment? If so, then it is very likely that the term offshore investment has been tossed at you more often than not.

What is offshore investment? Offshore investment is a way of making one’s money grow by investing in various ventures abroad that is outside your own country of residence.

Why venture into offshore investment? The most popular reason cited for investing in foreign waters is to evade the tax enforcements in one’s own country. Most people who reside in high-tax areas like US, UK, Canada or Japan see domestic investments as a futile exercise because of the heavy tax penalties that one has to pay. While tax is the driving force behind majority of offshore investments, there are others who invest into foreign lands with the intention of earning huge returns and not of evading taxes.

A survey by YouGov revealed that as much as 55% of adult Britons were seriously considering settling in another country. Two factors can be attributed to have triggered this feeling among Britons. The first being, the ever worsening pension situation in the country, which has prompted several Britons to look elsewhere for their retirement savings. The second of course being the universal dream of owning a holiday home Read more…