By investing in a Roth IRA, you are able to take advantage of the compounding effects of your investment returns on a tax-free basis.  In addition, you do not have to pay any taxes on the money you withdraw after age 59½.  You cannot deduct your contributions to this type of IRA, but, as you can see from the table below, you come out with a much greater advantage by allowing your returns to compound tax-free for the years to come.

The power of tax-deferred compounding

There are limits to how much income you can make and still be able to contribute to a Roth.  But if you are below those income thresholds, you should contribute as much as possible to your Roth.  Even if your income begins to go beyond the threshold as you become more successful, you can put aside as much money as possible in a Roth while you still qualify.  At least you will have the advantage for that pool of funds.

After your income goes beyond the threshold, there are other tax shelters you can use for your retirement.  You can contribute to a 401(k) program, or you can take advantage of a defined benefit or defined contribution program your employer may have set up.  Many employers have done away with their defined benefit and defined contribution plans as a result of the more popular 401(k) plans.  This is because their liability is less with a 401(k) than with either of the other plans.

With a defined contribution plan, employers are bound to a specific percentage contribution of the company’s profits to the employees.  If the company experiences a down year, it must find a way to make that contribution no matter what.  In a defined benefit plan, the employer guarantees the benefits of the plan to you as an employee.  That means that no matter what happens in the investment markets or the economy, your employer is bound to give you a specific amount of benefit for your retirement.

It’s easy to see why employers would choose a 401(k) over the other two plans.  Many employers provide matching contributions to some degree to 401(k) contributions after you are “vested,” or after you have stayed with the company for a certain number of years.  But you must be careful to find out whether you are allowed to make other investments than in the company’s stock.  Many investors have lost their entire retirement nest eggs by having their 401(k) plans invested only in one thing – usually the company’s stock where they are employed.

Hopefully, investors will have learned from this mistake and will be more careful to diversify their investments both inside and outside of their 401(k) plans.

Self-employment options

If you are an independent contractor or if you own your own company, you have a few other tax shelter choices.  One of these is a Simplified Employee Pension plan, or a SEP plan.  You can tuck away a significant portion of your income in these and other plans such as Keoghs, within certain limits.  You can contribute up to 13 percent of your income in a SEP and other profit-sharing plans and up to 20 percent in Keogh and defined contribution plans.  You can shelter a total of $30,000 per year in a mix of these types of plans.

If you are en entrepreneur, a doctor, lawyer, writer, entertainer, or other such entrepreneurial professional, more than likely you can set up one or more of these types of plans.  If you have a partner, you can use a Keogh plan, but you must also establish pension plans for your employees.

Warmly, JEFF

P.S. A little bit of saving and planning can really pay off.

“Creativity is just connecting things” – Steve Jobs

The First-Class postage rate is going up on January 22, 2012.  The increase for a letter goes from 44 cents to 45 cents.

The opportunity comes in the form of the “Forever” First-class stamps.  These stamps are priced @ 44 cents until the 22nd of this month.  Then on the 22nd Bam-o!

They are now worth 45 cents, guaranteed!  That is a 2.2% increase, overnight.  (Annualized rate of 792%)

For more details of this amazing opportunity click here: Jan 2012 Postal Service rate increase

Warmly, JEFF

P.S.  Seriously, postal rates are going up.

“When you do the common things in life in an uncommon way, you will command the attention of the world” – George Washington Carver

One item that is surprisingly NOT new is the Federal Mileage Rate.  For 2012 the business mileage rate will remain the same, $0.555.  This rate was changed to 55½ cents in July 2011 and will remain in effect until further notice.

If you need a new Mileage Log for your auto usage, I have them!  I would be happy to mail you one (or two).  Just drop me a line and I’ll get a book out to you A.S.A.P.

For additional information see: IRS Announces 2012 Mileage Rates

Warmly, JEFF

P.S.  Other mileage rates for 2012, medical/moving @ $0.23 and charitable @ $0.14.

“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. — Red Adair, when asked what his fee was for extinguishing oil well fires after the Gulf war.

The powers in Washington recently passed a payroll tax cut for January & February 2012.

This new action is better described as a cntinuation of the tax rates that were in place for 2011.  The employee share of Social Security is 4.2% for Jan & Feb.  This is a reduction of 2% from the historic rate of 6.2%.

For additional details: Payroll Tax Cut for Jan & Feb 2012

Warmly, JEFF

P.S.  This only affects the amount paid into Social Security by employees & self-employed individuals, it has NO affect on Social Security benefits paid to beneficiaries.

“The most important single ingredient in the formula of success is knowing how to get along with people.” – Theodore Roosevelt

Don’t miss this easy tax deduction!

For residents of Idaho, you must consider this easy to use tax credit.  This credit is available to you even if you don’t itemize your deductions.

Idaho offers a tax credit for donations made to specific Idaho charities.  One of the best ways to take advantage of this credit is to donate goods (for example, used household items) to the Idaho Youth Ranch.  See list of donation sites: Idaho Youth Ranch Thrift Store Locations

This tax credit is not limited to the Idaho Youth Ranch.  Find a complete list on pages 24-25 of this document: Idaho Instructions

Cash donations to Idaho educational entities also qualify. (But donations of goods and services to schools don’t qualify).  New for 2011-the credit amount has increase to $1,000 for joint returns!

As with all good things (like Christmas cookies) there are limits.  The credit is limited to smallest of the following:

1. ½ of the amount donated,
2. 50% of the Idaho income tax
3. $100-$1,000 depending on filing status and type of contribution.

Keep in mind, this credit is in addition to the amount claimed on your Sch A, itemized deductions-Double dipping!

Merry Christmas!  JEFF

P.S.  Consider making a year-end contribution to an Idaho preferred charity and give your tax return a gift.

“Leadership requires the courage to make decisions that will benefit the next generation” – Alan Autry

One of the secrets of success is making the most of your strengths. First, though, you have to determine what your strengths are-and they may not be obvious, especially if you’re just starting out or looking to make a career change. Zero in on the skills that make you special by looking for these clues:

• What tasks attract you?  Think of the types of jobs that you look forward to, those that you’d find some way to do even if you weren’t paid.
• What tasks do you lose yourself in?  When you’re involved on certain tasks, do you forget what time it is and how long you’ve been working? These will usually be the jobs that best utilize your skills.
• What do you learn quickly?  You probably struggle to master some skills, yet others you pick up effortlessly. This is because you have some natural talent and a deep desire to learn more.
• What do other people ask for your help with?  Pay attention to the jobs you’re assigned and the favors people ask of you. They wouldn’t come to you if you weren’t good in those areas.
• Where do you succeed?  This may seem obvious, but some people miss the forest for the trees. Take a look at the tasks you’ve done best at; you’ll find that they make use of your most important skills.
• What brings you satisfaction?  No matter how tired you are, some tasks just seem to make you feel good at the end of the day. You’ll do better in life and on the job by concentrating on work that you find fulfilling.

Warmly, JEFF

P.S.  Focusing on your strengths will take you a lot farther than dwelling on your weaknesses.

“I like nonsense; it wakes up the brain cells.  Fantasy is a necessary ingredient in living; it’s a way of looking at life through the wrong end of a telescope, which is what I do, and that enables you to laugh at life’s realities.” – Dr. Seuss

For instance, money that you get back from an investment that is simply a return of your original principal does not qualify as a capital gain.  You traditionally receive dividends that include return of principal from such investments as real estate investment trusts (REITs) or utility stock investments. 

Warmly, JEFF

P.S. A little bit of understanding and planning can really pay$$$off.

P.S.S.  I will be out of the office Thanksgiving week, Nov 21-25^th.  Happy Thanksgiving!

“Tail-bearing emits a threefold poison; for it injures the teller, the hearer and the person concerning whom the tale is told” – Unknown